On Monday, construction and heavy equipment maker Caterpillar (CAT) announced its quarterly earnings, which weren't all that bad considering the fact it reported the best third-quarter profit and sales numbers since its inception. After examining the earnings reporter further, I found the company's outlook on global growth a bit troubling.
According to WallStreetCheatSheet.com, "Caterpillar is very cautious on the slowdown taking place around the world. The company now expects 2012 sales and revenues to be around $66 billion and earnings in a range between $9 and $9.25 a share. This is down from its previous forecast of $68 billion to $70 billion in sales with a profit of about $9.60 a share. Analysts estimated 2012 sales to come in at $67.6 billion with a profit of $9.40 per share."
Although Caterpillar's results were solid, revenue estimates were a bit off and therefore alternatives should be considered. If global growth continues to slow, where should long-term investors turn? As an alternative, I think the gold sector will be less affected by a global slowdown, and as a result I've chosen to establish a position in two gold companies that could weather such a storm under such conditions.
Barrick Gold Corp (ABX) is a global leader in terms of gold production and currently has a total of 26 operable mines throughout the Australian, North and South American, and Pacific regions. One of the things shareholders should also note that Barrick Gold also has a 75% stake in the company's African-based counterpart, African Barrick Gold, plc.
According to the company's 2012 annual report there are three things investors should consider to be positive catalysts ahead of establishing a long-term position. First, the company currently holds the largest amount of proved (and probable) reserves in the world with a total of 139.9 million ounces. Second, the company has demonstrated record adjusted net earnings of $4.66 billion for 2011, which marks the third-consecutive year of such growth by the company. Lastly, the company increased its annual dividend 25% to $0.60/share from the previous distribution of $0.48/share.
Yamana Gold Inc. (AUY) is one of the leading Canadian gold companies and currently has operations in Argentina, Brazil, Chile and various other locations through South and Central America. In terms of recent earnings, the numbers haven't been all that bad. In the company's most recent quarter Yamana Gold Inc. reported EPS of $0.18/share which missed estimates of $0.21/share. One of the things shareholders should also note is the fact that, "AUY plans to increase production by 60% by 2014. The Mercedes mine is ramping up and C1 Santa Luz and EPAP are more than 85% complete. The company's Pilar mine is more than 50% complete and is scheduled to start in mid-2013."
Even though results missed estimates by $0.03/share, there are a few positive variables to consider moving forward. First, the company is showing promise in terms of production as the company plans to demonstrate a 60% increase in overall gold production. Secondly, the company has one of the most sustainable dividends among its peers, as it has increased its dividend four times since June 2011. Lastly, and according to Eric McWhinnie, "gold could even be used to help solve the eurozone's massive debt load."
Are there any negative catalysts to consider before establishing a position in either Barrick Gold or Yamana Gold? When it comes to many of the Gold Miners (GDX) within the sector, a sudden drop in the price of Gold (GLD) always plays the role of a negative catalyst from a macro standpoint. From a company-specific standpoint, both Barrick and Yamana have a significant exposure to foreign currencies and any decline in the U.S. Dollar, compared to the currencies ABX has exposure in, could increase costs and hurt both bottom and top line numbers.