Caterpillar’s Net Rises As Cost Cuts & Construction Sales Growth Outweigh Mining Weakness

Caterpillar‘s (NYSE:CAT) first quarter profits grew as gains from cost reduction measures and higher construction equipment sales more than offset the weakness from the global mining industry. The company’s earnings rose to $1.44 per share in the first quarter, from $1.31 per share in the prior year period. Buoyed by this solid profit performance in the first quarter, the company also raised its full year earnings guidance by 25 cents a share and now expects its 2014 earnings including restructuring charges to be around $5.55 per share. ^[1]

Caterpillar’s (CAT) first quarter top line was flat at $13.2 billion when measured on a year-over-year basis as a decline in mining equipment sales was balanced by higher construction equipment and reciprocating engine sales. ^[1] However, given the weak order inflows for new mining equipment and machinery from mining companies, CAT lowered the guidance for its full year mining sales. Earlier the company had anticipated its 2014 mining sales to fall by 10% annually, but now given the persisting weakness in the sector, the company anticipates these to fall by 20% annually. On the bright side, CAT also expects this decline from its mining segment to be offset by additional growth from its construction equipment sales. Accordingly, the company has maintained its 2014 sales outlook at $56 billion in a range of plus or minus 5%. ^[1]

We currently have a stock price estimate of $97.56 for CAT, around 5% below its current market price. We are in the process of incorporating first quarter results and shall update our analysis shortly.

See our complete analysis of Caterpillar here

Lower Demand From The Global Mining Sector Sinks CAT’s Mining Equipment Sales

During the first quarter, demand for new equipment and machinery from mining companies continued to decline. As a result, CAT’s mining equipment sales fell across all major geographies including North America, Europe, Asia-Pacific and Australia. Overall, the company’s mining sales contracted by more than a third to $2.1 billion in the first quarter. ^[1] This severe decline is a result of mining companies across the world slashing their cost and capital spending in an attempt to boost their profits. Many mining companies in the recent past incurred large asset write-offs which forced them to cut back on investment in new mines and and equipment. Instead, currently most mining companies are focusing on increasing productivity at their existing mines. This is weighing on demand for new mining machinery and equipment such as mining trucks, wheel loaders, shovels and boring equipment.

Looking ahead, although prices of most mined commodities remains above investment thresholds and mine production continues to improve, CAT figures that recovery in demand for new mining equipment is not likely in 2014. Thus, 2014 like 2013, will likely be a tough year for CAT’s mining business.

Higher Construction Equipment & Engine Sales Offset The Decline In Mining Equipment Sales

On the bright side, this decline in CAT’s mining segment sales was offset by growth from its construction equipment and engine sales. CAT’s construction segment sales rose by 20% annually to $5.1 billion in the first quarter. ^[1] This increase was primarily driven by higher purchases by CAT dealers in anticipation of higher end user demand in the second quarter. CAT’s construction sales have a certain degree of seasonality as its dealers usually add to their inventories during the first quarter in preparation of higher deliveries to end users such as construction companies in the second quarter. Additionally, this growth is dealer purchases during the first quarter was spread across all major regions including North America, Europe, Africa & the Middle-East (EAME) and China. This suggests that CAT dealers are anticipating construction equipment sales to end users to rise across these major markets in the coming months. This is a good sign for CAT and we figure the company raised the outlook for its construction equipment sales on the basis of these solid dealer purchases to 20% year-over-year growth in 2014, from 10% year-over-year growth forecast earlier.

CAT’s energy & transportation segment sales which comprise of reciprocating engines, turbines and locomotives also rose by 8% annually to $4.8 billion in the first quarter. ^[1] This increase was primarily driven by higher sales of engines to power generation and oil & gas industries. Overall, sales growth from construction and energy & transportation segments enabled CAT to offset the decline in its mining segment sales.

Cost Reduction Measures Expand Margins & Profits

Additionally, even as higher construction equipment and engine sales balanced lower mining equipment sales, CAT’s first quarter profits rose on higher margins driven by cost reduction activities. The company has been undertaking large scale restructuring to lower its operating costs. It is consolidating plants to ensure greater sharing of common resources as well as reducing headcount to save on salaries. During the first quarter, CAT reduced its workforce – both full time and flexible – by approximately 1,100 employees. ^[2] Compared to the end of last year’s first quarter, the company’s workforce had 9,250 fewer employees at the end of this year’s first quarter. But as these restructurings have one-time costs associated with them, CAT incurred $149 million in these costs in the first quarter. These restructuring charges were primarily related to the reduction of the company’s workforce at its Gosselies, Belgium, facility. This reduction of workforce in Belgium is expected to continue in the coming months and accordingly CAT anticipates to incur a total of $300 million in one-time costs against them in 2014. In all, CAT anticipates to incur restructuring costs of around $400-500 million in 2014. ^[1] We figure gains from these restructurings in the form of lower operating costs and higher margins will far outweigh their one-time costs.

In the first quarter, these cost reduction activities were instrumental in lowering the company’s SG&A and R&D expenses by $152 million, on a year-over-year basis. ^[1] In the remaining months of 2014, as these cost reduction measures are expected to remain underway, we figure they will continue to drive growth in CAT’s earnings.

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1. CAT’s 2014 Q1 earnings form 8-K, April 24 2014, www.caterpillar.com [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
2. CAT’s 2013 Q4 earnings form 8-K, January 28 2014, www.caterpillar.com [↩]