Caterpillar’s Lower End User Sales Point To A Tough Second Quarter

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Caterpillar

Caterpillar (NYSE:CAT) recently reported that global sales by its dealers are continuing to fall, primarily due to weak demand from the mining sector. For the three months ended May 31, 2014, Caterpillar (CAT) reported that sales of mining machinery by its dealers fell by 46% annually. [1] Though this decline was slightly offset by growth in sales of construction machinery, overall sales by CAT dealers to end users fell significantly during this period. These lower end user sales for the three month period ended May 31 indicate that CAT will likely face a tough second quarter. In the first quarter as well, lower end user sales weighed on CAT’s top line, which remained flat on a year-over-year basis. The only silver lining in these latest retail statistics is that sales of construction and mining machinery by CAT dealers rose from North America. But, the severe decline in end user sales from other regions including Asia-Pacific and Europe more than offset this growth from North America.

We currently have a stock price estimate of $109 for CAT, approximately in line with its current market price.

See our complete analysis of CAT here

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Will There Be A Recovery In Mining Machinery Sales To End Users In The Near Term?

CAT sells its products to its dealers who in turn sell them to end users like construction and mining companies. So, as dealer sales to end users are continuing to fall, dealers are purchasing at subdued levels from CAT. This is weighing on CAT’s sales. Now, the retail sales data for the three month period ended May 31, shows severe decline in global sales by CAT dealers. We figure with the mining sector weakness persisting through June, global sales by CAT dealers will likely decline in June as well. Thus, even for the three month period ending June 30, global sales by CAT dealers will likely decline on a year-over-year basis. These lower end user sales during the second quarter will in turn maintain pressure on CAT’s second quarter top line.

Additionally, seeing sustained weakness in end user demand, CAT dealers will likely not pick up their purchase activity for the foreseeable future. So, CAT’s top line will likely not begin to recover in the near term. This also explains why CAT forecasts its 2014 top line to be around $56 billion, just above its 2013 top line of $55.7 billion. [2] [3] The essential question then is: when will CAT likely see a recovery in demand from the mining sector which in turn will help return its top line to growth trajectory? There are certain trends in the global mining sector that 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. The companies are doing this to limit their near term operating costs. But eventually, these companies will have to undertake aftermarket machine part purchases in order to prevent their machines from downtime. This will lead to recovery in the mining aftermarket. Additionally, mine production and consumption of commodities such as coal and iron ore continue to grow and are expected to rise through 2014 based on improving global economic growth. We figure this trend will increasingly compel mining companies to resume their new machine purchases. Together, these trends of lower than normal levels of aftermarket machine part purchases by mining companies and steadily growing mine production will lead to recovery in the global mining sector. Till that time however, CAT will continue to face a tough macro environment, which will weigh on its second quarter results.

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Notes:
  1. CAT dealer statistics for 3 months through May 31, 2014, June 26 2014, www.caterpillar.com []
  2. CAT’s 2014 Q1 earnings form 8-K, April 24 2014, www.caterpillar.com []
  3. CAT’s 2013 Q4 earnings form 8-K, January 28 2014, www.caterpillar.com []