1 Silver Lining in Caterpillar's Awful Third Quarter


Weak global demand has sent Caterpillars profits plunging. Photo Credit: Wikimedia Commons.

It was a rough quarter for Caterpillar (NYSE: CAT  ) , as the world's largest seller of bulldozers and excavators succeeded only in digging itself into a deeper hole. Weak global demand for mining equipment continues to drag earnings lower, a full 44% lower in the third quarter. Let's take a look at some of the results and see if there is a silver lining for the company and its investors.

Overall
Starting from the top, Caterpillar's revenue declined 18% to $13 billion. Management expects revenues to be about $11 billion lower than last year, making 2013 a painful period for its investors. Unfortunately, Caterpillar's top-line revenues aren't expected to improve too much next year, as management predicts sales to remain flat, plus or minus 5%.

Sales of construction and mining equipment dropped 9%, while sales of machinery and power systems plunged further, down 19%. Operating margins also declined 600 basis points to 10%. Caterpillar has taken actions to mitigate the impact of its revenue decline by temporarily closing plants and reducing its global workforce by 13,000.

For the quarter the company reported earnings of $1.45 per share, far below expectations of $1.66 and below last year's $2.45 result. That performance, along with no expectations of improving global demand for mining equipment, led management to lower its full year earnings guidance from $6.50 per share to $5.50 -- the company's third guidance reduction this year.

"Unfortunately, order rates have not picked up much despite continuing strong commodity production," said Chairman and Chief Executive Doug Oberhelman in a press release. "That has caused us to ratchet down our sales and revenues outlook as we have moved through 2013."

Silver lining
Brian Langenberg, the principal at the Langenberg and Co. research firm, didn't pull any punches when summarizing the results. "The third quarter was hideous, the fourth quarter will stink and the guidance for 2014 is very, very subdued," said Langenberg, according to Reuters.

It's tough to find a silver lining in Caterpillar's report, but it might console investors that the company continues its effort to return some value to shareholders. Caterpillar increased its dividend by 15% in the second quarter, and repurchased $2 billion of common stock this year.

In addition, the company's machinery and power systems operating cash flow posted a $1.1 billion improvement over last year's third quarter. Caterpillar expects this year's cash flow to be the second best in company history, and its enterprise cash balance of $6.4 billion should allow the company to continue returning value to shareholders through share buybacks or dividend hikes. 

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  • Report this Comment On October 28, 2013, at 10:04 AM, Jacob9009 wrote:

    Above all that the company’s performance fell in every geographical segment YoY. Asia/Pacific was down the most; it fell 32% from $4.2 billion in 3QFY12 to $2.9 billion in 3QFY13 as per http://goo.gl/AhVnWq analysis. Its due to a fall in average prices of coal and copper since the start of 2011, which caused coal and copper companies to reduce investment in future projects, lowering demand for Caterpillar’s mining machinery. ultimately it has effected its performance so bad,

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