The decline in capital spending from major mining companies including Rio Tinto (NYSE:RIO), Vale (NYSE:VALE), BHP Billiton and others due to a combination of weak global economy and some industry issues has severely impacted the demand for mining machinery and equipment manufactured by Caterpillar (NYSE:CAT). This decline in mining business, which generated nearly one-third of CAT’s total sales in 2012, has forced the company to guide for a decline in sales and earnings in 2013 compared to 2012. Currently, CAT forecasts its 2013 sales between $57 billion and $61 billion, down from nearly $66 billion in 2012, and its 2013 earnings of around $7 per share compared to $8.48 per share in 2012.  
We currently have a stock price estimate of $86 for Caterpillar, marginally above its current market price.
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Mining Sector Is Facing Near-Term Headwinds
In the first quarter earnings release, CAT had announced an estimated sales decline of its traditional mining machinery – mining trucks, loaders and bulldozers – by as much as 50% in 2013 from 2012. It had also estimated the sales of its mining products acquired from Bucyrus to decline by nearly 15% year-over-year in 2013. 
This decline in CAT’s mining segment sales has been 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 has also contributed to the decline in capital spending from the sector.
In addition to this decline in spending from mining companies on equipment and machinery, CAT’s sales have also been impacted from the decline in dealer inventories. CAT sells its products to dealers who in turn sell them to the end users (mining companies). Thus, the company gets impacted from fluctuations in its dealer inventories. Due to the current weak demand from mining companies, CAT dealers have reduced their purchase activity to below end-user demand levels in an attempt to lower their inventories, thereby impacting the company’s sales. In the first quarter for instance, CAT dealers had lowered their inventories by $700 million, which constituted a major portion of the 2.8 billion y-o-y decline in the company’s machine sales. 
However, if the recent past is anything to go by, the mining demand environment could change rapidly. Around this time last year, the demand scenario was optimistic compared to the current downbeat view. Prior to that, in mid-2009, during the financial crisis, the demand outlook was bleak; however, by mid-2010 it recovered with a strong inflow of new orders. Thus, we believe that with a recovery in global economic growth, capital spending and demand from mining companies will pick up as the long-term growth fundamentals of urbanization and growing global demand for energy remain in place.
Construction And Power Systems Are Doing Better
Additionally, the remaining two-third of CAT’s business – construction and power systems – is doing relatively better. While the demand for construction equipment is facing pressure from the decline in Europe, it is continuing to grow from Latin America and China. In power systems, where CAT sells a variety of equipment, including locomotives, engines and turbines for industrial, marine, petroleum and electric power industries, the performance has also been steady in the year-to-date period. Notes: