Caterpillar April Sales Drop 13% - Analyst Blog


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Caterpillar Inc. 's ( CAT ) shares dipped 3.63% following its announcement of a 13% decline in global retail sales for the three months ending Apr 2013, hitting a nadir in 2014. Sales dropped in all regions, recording the worst performance so far in the year, barring North America. Caterpillar had suffered a similar fall in February last year. The company has suffered consecutive 17 months of declining sales.

Prior to this, Caterpillar had witnessed a 20-month stretch of negative sales from Sep 2008 to Apr 2010 due to the global recession. In May 2010, the company reverted to sales growth and there was no looking back as sales picked up on strong equipment demand both domestically as well as in emerging markets.

However, sales started declining since Dec 2012, affected by tougher year-earlier comparisons, rising inventories of unsold equipment, weak economic conditions, and slowing down of the Chinese economy, which had earlier been the main driver of construction and mining demand.

In 2013, the monthly sales decline rate ranged from 4% to 13%. Caterpillar started 2014 with an 8% decrease in January and February, but it went further downhill with a 12% drop in March and the latest 13% reported for April.

As mentioned earlier, in April, North America, Caterpillar's largest market in terms of geography, was the only saving grace with a 12% increase. North America has shown considerable improvement in 2014 compared with the growth range of 1% to 6% reported in the first three months of this year.

Sales in Latin America nosedived 28% in April, the worst performance so far this year. The sales growth graph has gone downhill for the region with an 11% drop in January followed by a 16% decline in February and 21% in March.

Asia/Pacific also dragged down results with a 25% slump, worsening from the 17% drop each in January and February and 20% in March. Sales in Europe, Africa and the Middle East (EAME) plummeted 24%.

Sales in the Resource Industries segment plunged 49% in April, as sales dipped across all regions. Asia/Pacific fared the worst with a 70% slump, followed by Latin America and EAME with respective declines of 68% and 45%. North America also reported a 3% dip. This does not come as a surprise as sales in Resource Industries will continue to be affected as mining companies keep reducing their capital expenditures in 2014.

Sales in Construction Industries was the bright spot, increasing 6%, triggered by increase in all regions except EAME. Latin America and North America together led with a 17% climb. Asia/Pacific was up 2% while EAME sales fell 11%.

Sales in the Energy & Transportation segment edged up 3%. An 11% increase in sales in the Industrial sector and an 8% in Oil & Gas was offset by a 3% decline in sales in both the Power Generation and Transportation sectors.

Caterpillar nevertheless delivered an impressive first quarter with earnings increasing 22% to $1.61 per share despite revenues remaining flat year over year at $13.2 billion. The company's incessant efforts to cut down costs, continued deployment of lean manufacturing initiatives and improvement in the Construction segment helped mitigate the effect of lower mining-related sales on its profits.

Caterpillar expects revenues in 2014 to remain flat with 2013 or move up or down in a 5% range, and earnings per share to be at $6.10 per share. Segment-wise, Construction Industries and Energy & Transportation will deliver sales growth, while Resource Industries will continue to be a deterring factor due to sluggish order rates for mining equipment.

Caterpillar also reported a backlog of $19.3 billion at the end of the first quarter, up 7% year over year, driven by improvement in Energy & Transportation, mainly locomotives. This marks a reversal from the decline in backlog reported earlier.

The decline in sales reflects the sluggishness in the mining sector and Caterpillar will weather this storm. The company will benefit from the recovery in the construction sector and macroeconomic stabilization in Europe.

Furthermore, Caterpillar has initiated extensive cost-saving programs across its global businesses. The company will continue to benefit from additional restructuring actions in 2014 to optimize its cost structure and improve its operational efficiency.

Caterpillar currently retains a Zacks Rank #1 (Strong buy). Some other stocks that are worth considering in this sector include Gorman-Rupp Co. ( GRC ), Columbus McKinnon Corp. ( CMCO ) and Komatsu Ltd. ( KMTUY ). While Gorman-Rupp sports a Zacks Rank #1 (Strong Buy), Columbus McKinnon and Komatsu carry a Zacks Rank #2 (Buy).

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