Weak Mining Demand Will Dig Into Caterpillar’s Earnings

by Trefis Team
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    Quick Take
  • In the second quarter, Caterpillar’s sales and profits will likely post a decline due to low demand from the mining sector worldwide.
  • This decline in mining demand is the result of primarily industry specific issues like capital control from many mining companies following several write-offs.
  • In comparison, the results for Caterpillar’s construction and power businesses are expected to be better.

Caterpillar (NYSE:CAT) will announce its second quarter earnings on July 24. The construction, mining and power equipment manufacturer will likely post a decline in sales and profits due to weak demand from the global mining sector. Mining sales which constitute around a third of the company’s total sales have been impacted lately from the decline in capital spending from mining companies including Rio Tinto (NYSE:RIO), Vale (NYSE:VALE) and BHP Billiton. This decline in spending from the mining sector is being driven by a combination of weak global economy and some industry specific issues.

On the bright side, construction and power sector businesses of Caterpillar are expected to post relatively better results. However, in all, the company faces a tough quarter. We currently have a stock price estimate of $86 for Caterpillar, marginally below its current market price.

See our complete analysis of Caterpillar here

Low Mining Sector Demand Will Weigh On Earnings

In the first quarter earnings release, CAT estimated the sales of its traditional mining machinery – mining trucks, loaders and bulldozers – to decline by around 50% in 2013 from 2012. It also estimated the sales of its mining products acquired from Bucyrus to decline by nearly 15% year-over-year in 2013. [1]

This decline in CAT’s mining segment sales is being driven by issues surrounding the mining industry that include an increasing focus of mining companies on cost and capital control after incurring several write-offs. Some mining companies have also undergone management changes, which is also contributing to the decline in capital spending from the sector.

Due to these issues, mining sales of Caterpillar have declined by 23% y-o-y in the previous quarter with sales declining across all geographies except Latin America. [1] In the second quarter, we anticipate the trend to continue.

Construction And Power Sectors Will Likely Post Better Results

On the bright side, the remaining two-third of Caterpillar’s business – construction and power – is expected to post relatively better results. This is because major negative impacts from a correction in dealer inventories took place during the first quarter.

In the construction segment, demand for construction equipment manufactured by Caterpillar is continuing to grow from China; however, it is still facing pressure in Europe due to lower construction spending from the region. In power systems, where CAT sells a variety of equipments, including locomotives, engines and turbines for industrial, marine, petroleum and electric power industries, performance is also expected to be steady in the second quarter.

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Notes:
  1. Caterpillar’s Form 8-K, first quarter earnings, April 22 2013, www.caterpillar.com [] []
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