) reported a 9% decline in its global retail sales for the three
months ending Jul 2014. Even though sales remained in the red,
Caterpillar shares gained 0.4% as the graph after going downhill
till the 12% decline in May has started to pick up with the 10%
decline in June and the recent 9% decline in July.
This nevertheless marks the 20th consecutive month of declining
sales for the mining and construction equipment behemoth,
replicating its last 20-month stretch of negative sales from Sep
2008 to Apr 2010 due to the global recession. Following that phase,
in May 2010, the company rebounded 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, tables turned again since Dec 2012 as sales started
slipping, 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 each, but it went further downhill with a 12% drop in
March and the 13% reported for April. However, as mentioned
earlier, the sales growth decline rate has improved over the past
few months, triggering hopes of a recovery.
This July, sales dropped in all regions, while North America was
the only saving grace with an 11% increase. Compared with other
regions where the declines have worsened, North America has shown
considerable improvement in 2014, as evident from the growth range
of 1% to 14% reported so far in the year.
Sales in Latin America plunged 23% in July. Sales in Europe, Africa
and the Middle East (EAME) plummeted 16%. Asia/Pacific fared the
worst with a 29% slump, as miners continued to cut costs. The
descent in the sales trajectory in the region began with a 17% drop
in January worsening to 30% in May and June.
Sales in the Resource Industries segment plunged 33% in July, as
decline in sales across all regions offset a meager 4% rise in
North America. Asia/Pacific again fared the worst with a 50% slump,
followed by Latin America and EAME with respective declines of 47%
and 44%. This does not come as a surprise as sales in Resource
Industries will continue to be affected as mining companies have
slashed spending in the face of lower commodity prices.
Sales in Construction Industries remained flat year over year,
which was disappointing given that the segment has delivered
positive growth ranging from 3% to 9% so far in 2014. North America
witnessed a 15% increase which was offset by decline in other parts
of the world. Asia/Pacific was down 16% while Latin America was
down 14% and EAME was down 2%.
Sales in the Energy & Transportation segment moved south 5%. A
6% increase in the Oil & Gas sector and a 5% jump in sales in
the Industrial sector were offset by a 17% plunge in the
Transportation sector and 16% decline in sales in Power Generation.
Caterpillar's second-quarter revenues declined 3% year over year to
$14.1 billion, affected by weaker results from the Resource
Industries segment due to low end-user demand for mining
equipment. Geographically, North America was the only bright
spot with sales increasing as against declining sales in the other
regions. Such a trend was again witnessed in July.
Caterpillar, nevertheless, delivered a 17% increase in earnings to
$1.69 per share, thanks to its incessant efforts to cut costs,
continued deployment of lean manufacturing initiatives and
improvement in the Construction segment along with record profit
from Energy & Transportation, which helped mitigate the effect
of lower mining-related sales on its profits.
Caterpillar revised its 2014 revenue guidance to a range of $54
billion to $56 billion. The company had earlier projected a range
of $56 billion, up or down 5%, which translates to a range of $53.2
billion to $58.8 billion. The trimmed guidance reflects lower sales
of construction equipment in developing countries.
Though the decline in sales reflects the sluggishness in the mining
sector, we believe Caterpillar will weather the storm. The
Architecture Billings Index, which is considered a leading
indicator of U.S. non-residential construction, rose to a
seven-year high in July, indicating an imminent recovery of the
U.S. non-residential construction sector. The improvement in the
construction sector and macroeconomic stabilization in Europe will
somewhat help compensate the impact of the weak mining sector.
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 operational efficiency.
Caterpillar currently carries a Zacks Rank #3 (Hold). Some better
stocks that are worth considering in this sector include Blount
International Inc. (
), DXP Enterprises, Inc. (
) and IDEX Corporation (
). While Blount International sports a Zacks Rank #1 (Strong Buy),
DXP Enterprises and IDEX Corporation carry a Zacks Rank #2
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