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Caterpillar Is Not Coming out of Its Cocoon

If you need an idea of how bad the mining sector is right now, look no further than heavy equipment maker Caterpillar (NYSE: CAT  ) , which earlier this year laid off hundreds of employees as it sought to retrench, and just now said that even white collar jobs are going to get the ax.

In July, the mining and construction equipment manufacturer cut its profit picture for the second quarter in a row after it missed analyst expectations for the third straight time. With second-quarter earnings plunging 43%, Caterpillar anticipates revenues of $56 billion-$58 billion, with per-share profit of about $6.50. That was below its prior guidance of $57 billion-$61 billion in revenues and earnings of $7 per share.

But those numbers might come up short, too. While the sales numbers are pretty much in line with what Wall Street is looking for, analysts predict profits may come in light at about $6.30 per share. Worse for Cat, though, is the continued slide in monthly sales, which fell 10% for the three-month period ending in August.

After Caterpillar's last earnings report, I said I saw hope for recovery. While there is obviously a lot of negativity shown in the chart, I also saw beacons of light. I expected Latin America to turn negative eventually because it was heading in that direction, and North America to turn positive because it was on a steadily rising trajectory. Both of those scenarios have since played out, but a few regions, in particular the Asia-Pacific, have gotten worse.

Yet, as Caterpillar has noted, despite the weakness, sales in China have actually improved, even if they were offset by the rest of the region.

Glencore Xstrata has called for a new "age of austerity for miners," and companies are taking up the call, with everyone from BHP Billiton to Vale suspending projects or selling assets to right-size their operations to just core competencies.

While I might have been a little early in saying things may be flattening out for the heavy equipment maker, I still see prospects for a turnaround, even if Caterpillar is making itself leaner. North America is its largest segment, representing 38% of construction revenues as well as total sales, so its improvement may serve to lift the entire boat, and metal prices are firming or, as in the case of copper, running higher.

Not that there's not still trouble ahead. Cliffs Natural Resources (NYSE: CLF  ) has lined up powerful political opposition against the Export-Import Bank giving Caterpillar $650 million in long-term financing for the export of $522 million worth of mining equipment for mining and processing ore in Australia. Cliffs opposes the loan because the ore to be mined from the Roy Hill project will end up competing against Cliffs' proposed $1.5 billion Gogebic Taconite iron ore mine. 

Caterpillar's stock has bounced around the past few months, but has traded in a fairly close range. The latest news about layoffs hasn't changed that, which suggests that the market is pricing in such streamlining efforts and is waiting to see if there's another speed bump ahead or if Cat will ultimately surprise to the upside, as I continue to believe it will.

Emerging Like a Butterfly
With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!

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Related Tickers

9/30/2016 4:01 PM
CAT $88.77 Up +1.30 +1.49%
Caterpillar CAPS Rating: ***
CLF $5.85 Down -0.01 -0.17%
Cliffs Natural Res… CAPS Rating: ***