Caterpillar’s Retail Statistics Reinforce Expected Weakness

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Caterpillar (NYSE:CAT) recently released its retail statistics for the 3-month rolling period ended May, revealing declines in retail sales across all three segments – Resource, Construction and Energy and Transportation. [1] Ongoing softness in mined commodities and oil prices continues to take its toll on Caterpillar. These statistics reinforce the weakness we expect to see in the company’s results in 2015.

See our complete analysis of CAT here

Oil Price Weakness To Hammer Construction And Energy & Transportation Sales

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Sales to the oil and gas industry account for around a third of Caterpillar’s Energy and Transportation revenue and also a considerable portion of its Construction Industries revenue. Caterpillar’s Energy and Transportation segment provides the oil and gas industry with reciprocating engines, turbines, integrated systems and solutions, and related parts. Construction equipment is required to build wells and other infrastructure around rigs for oil and gas drilling.

As a result of declining oil prices, oil and gas companies have reduced capital spending in order to maintain cash flows, leading to a decline in demand for engines and turbines. This led to flat revenues at Caterpillar’s Energy and Transportation segment in the first quarter. Since oil prices currently remain below sustainable levels of $80-90 for Caterpillar and its customers, Energy and Transportation sales will likely decline over the coming quarters. This is corroborated by retail statistics for the segment, which reported a 6% decline in retail sales for the 3-month rolling period ended May. [1] It is pertinent to note that the decline in retail sales has become steeper through the year, which indicates that the weakness in retail sales is likely to persist.

The decline in oil prices has led to a 60% drop in rig counts, since a peak of 1,609 in October. [2] As rig counts have fallen, the demand for Caterpillar’s construction equipment has also weakened. This is evident from the 14% decline in Caterpillar’s Construction Industries retail sales for the 3-month rolling period ended May. [1] The segment is also suffering from the week construction activity in Asia Pacific, Europe, Africa and the Middle East, which has discouraged dealers from stocking inventory. Since oil prices are not expected to rebound any time soon, we expect to see construction equipment demand to remain suppressed through the year.

Resource Industries To Continue Falling

Low prices of commodities such as copper, coal and iron ore have led to reduced investments in mines and machinery, resulting in lower sales for Caterpillar’s Resource Industries segment, which manufactures mining equipment. In 2014, the segment’s revenue declined 33% year-on-year. [3]

Towards the end of last year, an upswing in sales of aftermarket mining equipment parts led the market to believe that Caterpillar’s Resource Industries segment could soon turn around. In preparation for a possible turnaround, Caterpillar also began building strategic inventory. [4] However, on its first quarter earnings call, the company reported a decline in aftermarket equipment for the Resource Industries segment, shattering expectations of a turnaround. The current price levels of mined commodities do not support any recovery in Caterpillar’s Resource Industries segment either. Accordingly, we expect that it will take some more time before Caterpillar begins to report improvements in sales of its mining equipment.

Despite Resource Industries retail sales continually declining for the past 2 years, there is one silver lining. According to Caterpillar’s retail statistics for the 3-month rolling period ended May, retail sales for the segment were down 8%, significantly moderate when compared to the 46% decline witnessed a year ago. [5] It seems that the sales decline will likely bottom out soon.

We currently have a price estimate of $85 for Caterpillar. For 2015, we estimate revenues of $50 billion, compared to a consensus estimate of $49.3 billion, and EPS of $5.00, compared to a consensus estimate of $4.98.

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Notes:
  1. 2015 YTD Retail Statistics, Caterpillar’s Website [] [] []
  2. U.S. Rig Count, Baker Hughes []
  3. Caterpillar’s 2014 10K SEC Filing, February 18, 2014, Caterpillar’s Website []
  4. Caterpillar’s (CAT) Management Presents at Credit Suisse 2014 Global Industrial Conference (Transcript), December 2, 2014, www.seekingalpha.com []
  5. 2014 Retail Statistics, Caterpillar’s Website []