Caterpillar’s Results Clipped By Mining Weakness But Its Sales Will Likely Stabilize In 2014

Caterpillar‘s (NYSE:CAT) revenues fell by 10% annually to $14.4 billion in the fourth quarter on continued weak demand for machinery and equipment from the global mining sector. However, the company’s fourth quarter earnings rose sharply by 48% annually to $1.54 per share, as its earnings in the prior year quarter were impacted by a one-time goodwill impairment charge. Excluding the impact from that one-time charge which Caterpillar incurred in the fourth quarter of 2012, its earnings grew by a more moderate 5% annually in the fourth quarter, reflecting gains from its cost reduction activities. ^[1]

For full year 2013, however, gains from CAT’s cost-reduction activities were more than offset by the negative impact on its sales from mining sector weakness. As a result, CAT’s 2013 earnings fell by 32% annually to $5.75 per share, while its 2013 revenues contracted by 16% annually to $55.7 billion. ^[1] Looking ahead, in 2014, the company anticipates its top line to stabilize as additional declines from mining will likely be offset by growth from its construction and power equipment sales. Accordingly, CAT guides its 2014 top line to be around $56 billion and its 2014 earnings to be around $5.30 per share including restructuring charges. ^[1]

We currently have a stock price estimate of $88.43 for Caterpillar, around 5% below its current market price. We are in the process of incorporating the fourth quarter earnings and shall update our analysis shortly.

See our complete analysis of CAT here

Mining Sector Weakness Weighed On Sales

In the fourth quarter, CAT’s mining equipment and machinery sales continued to get impacted by weak demand from mining companies, which focused on cost and capital control after incurring many asset write-offs in the recent past. Weak commodity prices, including those for iron ore and coal also contributed to mining companies cutting their new machine purchases, in an attempt to lift their profits and cash flows. These cost cuts, in turn, lowered CAT’s mining segment sales by $2.7 billion annually in the fourth quarter, more than offsetting growth in its construction and power segment sales. ^[1]

Cost Cuts Help Protect Profits From Mining Sector Weakness

On its part, CAT resorted to severe cost cuts to temper the impact on its profits from lower mining segment sales. For full year 2013, the company lowered its operating costs by more than $7 billion. CAT reduced its workforce – full-time and flexible – by around 9,700 employees during the year to around 133,000 employees at the end of 2013. The company also slashed its research and development costs by 17% annually ,and its selling, general & administrative costs by 6% annually through across the board austerity measures. CAT also shut down many plants temporarily to further clamp down on costs. In all, these measures helped CAT partially offset the impact on its profits from the $10 billion or 10% year-over-year decline in its 2013 top line. ^[1]

Segment Outlooks For 2014

Looking ahead, in the current year, CAT anticipates its mining segment sales to contract by 10% annually as mining companies will not likely resume their machine purchases in a big way in the near future. At the same time, the company anticipates its construction and power segment sales to grow by 5% each on a year-over-year basis, driven by a recovery in the US housing market, bottoming out construction market in Europe and continued growth from China. ^[1]

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1. CAT’s 2013 Q4 earnings form 8-K, January 28 2014, www.caterpillar.com [↩] [↩] [↩] [↩] [↩] [↩]