) 2013 results were severely impacted by mining sector weakness.
The company's revenues contracted by 16% annually to $55.7 billion
due to reduced spending by mining companies on new machines and
equipment purchases. Additionally, throughout 2013, CAT's
mining related after market machine part sales were impacted as
mining companies delayed maintenance and repairs on their fleets in
an attempt to lower their operating costs. This weakness from the
mining sector weighed heavily on CAT as it generated nearly a third
of its business from this sector.
However, looking ahead, there's some cheer for CAT as certain
trends in the mining sector point towards a recovery. Right now,
mining companies are working their newer machines more hours at the
expense of their older machines, which typically require more
frequent part replacements and repairs. Eventually, these
companies will have to undertake aftermarket machine part
purchases in order to prevent their machines from downtime.
Accordingly, Caterpillar currently estimates its mining related
aftermarket machine part sales to level off in 2014 after declining
Additionally, mine production and consumption of commodities
such as coal and iron ore continue to grow and is expected to rise
through 2014 based on improving global economic growth. We figure
this trend will also increasingly compel mining companies to resume
new machine purchases. On its part, CAT estimates its mining
segment sales to contract by 10% in 2014, from 2013. However,
these trends of lower than normal levels of aftermarket machine
part purchases by mining companies and steadily growing mine
production will, in our opinion, lead to recovery in the mining
sector. The essential question therefore is when this recovery will
It is here that we figure an analysis of mining sector's recent
past can prove helpful. In early 2009, outlook for the global
mining sector was bleak due to the downturn brought about by the
global financial crisis. By 2010, this bleak outlook turned
positive driven due to the recovery in the global economy. It
remained positive through 2011 and early 2012, where after it
turned bleak again due cost and capital controls initiated by many
mining companies after incurring large asset write-offs. The sector
continued to see a downcycle through 2013 as mining companies
lowered their capital investments in machines and equipment, but
right now backed by trends outlined above, we figure that recovery
in the sector is in sight. These past few years illustrate that
mining sector's outlook can change pretty rapidly. So, if not by
2014 end, then mining sector could see recovery in early 2015.
Caterpillar's fourth quarter results also exceeded expectations
reflecting a bottoming out mining sector. The company's profits
grew by 5% annually in the quarter after falling steadily for the
past many quarters.
We currently have
stock price estimate of $88.43 for CAT
, around 5% below its current market price.
See our complete analysis of CAT here
Long Term Growth Factors For The Global Mining Sector
Caterpillar's exposure to the mining sector increased in 2011
after its $8.8 billion acquisition of Bucyrus. The weakness that
followed this sector over the next couple of years makes the
acquisition seem like a case of bad timing, but in our view, long
term fundamentals that support growth in the mining sector remain
intact. Enormous demand potential for energy and infrastructure
remains in the emerging countries of Asia-Pacific and Latin America
that requires mined commodities such as coal and iron ore. Thus, as
emerging countries continue to add power generation capacities and
build physical infrastructure, demand for machines and equipment
that enable mining will recover.
Focus On Returning Capital To Shareholders Boosts
Confidence In The CAT Stock
Additionally, even during this period of weakness, CAT's focus
on returning significant capital to its shareholders through
dividends and share buybacks eases their concerns and indicates
that management is confident about a strong future for the company.
Recently, CAT announced that it completed share repurchases worth
$1.7 billion in the first quarter and authorized an additional $10
billion for share repurchases through 2018. The company also
paid a dividend of 60 cents a share last quarter which translates
to an annual yield of around 2.5%.
Separately, the remaining two third of CAT's business -
construction and power systems - are doing better. In the current
year, the company anticipates its sales from both these segments to
rise by around 5% annually driven by growing construction market in
China and recovering housing market in the US. An early recovery in
the global mining sector will support growth from construction and
power systems segments to boost the company's results.
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