Caterpillar (NYSE:CAT) recently reported that global sales by its dealers declined year-over-year in the three months ended August 31, 2013. This fall in dealer sales was led by a 30% drop in mining and construction machinery sales from the Asia-Pacific region and a 21% drop in engine sales from the global petroleum industry. Latin America, where most of the demand came from in the year so far, also witnessed a year-over-year drop of 3% in machine sales. Overall, Caterpillar’s mining and construction machinery dealer sales fell by 10% annually while its engine and turbine dealer sales to the electric power generation, industrial, transportation and petroleum sectors fell by 6% annually in the three months ended August.  This significant decline in Caterpillar dealer sales to end users confirm the weak state of the global mining, construction and power sectors, and indicate that the company will likely face a tough third quarter.
We currently have a stock price estimate of $86.40 for Caterpillar, approximately in line with its current market price.
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Tough Third Quarter
As the mining sector remains weak due to reduced capital spending by major mining companies after having witnessed several asset write-offs in the recent past, Caterpillar’s overall end user sales (by dealers) are expected to remain weak in September. Thus, the company’s dealer sales will likely fall year-over-year in the current quarter.
We figure that this fall in dealer sales (to end users) will be exacerbated by their inventory reductions which will inflict a greater impact on Caterpillar’s sales. Caterpillar sells machines and engines to its dealers who in turn sell them to their end users like mining and construction companies, and so Caterpillar is open to impact from fluctuations in its dealer inventories. Last quarter too, the company’s top line contracted by 16% annually due to weak mining demand worldwide and dealer inventory reductions. (See Weak Mining Demand Digs In To Caterpillar’s Earnings And Outlook)
Looking ahead, the weak sales by dealers to their end users indicate that the dealers may continue to cut inventories for a sustained period, and this might impact Caterpillar’s near-term sales. However, in the long term, we figure that the company will return to growth driven by the global trends of urbanization, rising population and prosperity, which will raise demand for energy, metals and infrastructure to drive growth in mining and construction sectors.Notes: