Caterpillar Digs a Deeper Hole

As pretty much expected, heavy equipment maker Caterpillar (NYSE: CAT  ) finds itself at the bottom of a pretty deep hole, after reporting third-quarter earnings that saw revenues tumble 18% and profits plunge 44% from the year-ago period.

Caterpillar may want the markets to believe that the mining sector gets an inordinate amount of attention. And it may feel that Wall Street should also take a gander at its power systems business instead. But the mining segment nonetheless caused the equipment maker to slash its full-year guidance yet again, gouging 15% from the earnings estimates it had offered at the end of the second quarter. Besides, the power systems business isn't doing so well, either; Caterpillar expects revenues to fall 5% for the full year.

With Caterpillar's expected revenues for the year anticipated to come in at $55 billion -- more than $10 billion less than it realized in 2012 -- we're looking at a 17% drop, nearly three quarters of which is due to its resource industries, which is pretty much all about selling heavy equipment to the mining industry. There's a reason investors pay attention to it.

Of course, investors have been waiting for this shoe to drop after Joy Global (NYSE: JOY  ) and Deere (NYSE: DE  ) issued gloomy assessments for the immediate future.

Deere, which has the benefit of generating a large portion of its sales from the agricultural industry, actually reported 4% higher net sales in its last quarter. But when you look at just its construction and forestry segment, sales were down 11% year over year on lower shipment volumes. It expects sales in the division to be down 8% for all of 2013.

For its part, Joy Global saw bookings plunge 36% in the quarter, with the sharpest declines (42%) coming from its underground mining business. Its outlook for the coming quarters reads like a litany of the woes plaguing equipment makers and the mining industry as a whole:

  • Commodities are in surplus
  • Europe's only just coming out of a multi-year recession
  • China is slowing
  • The U.S. is sluggish
  • Commodity prices are falling
  • Mines have turned uneconomic
  • Closures are on the horizon
  • ... and on and on and on.

As it sums up, "there is little incentive to invest in new mine capacity." Talk about an understatement.

Can it be, though, that despite the doom and gloom there are some silver linings to the very gray clouds hanging over Caterpillar's head? Sure! 

I've previously said my call on a bottom for Cat was premature, but I'm also looking at the continued improvement in the North American segment as a catalyst for overall growth. Latin America's decline is accelerating, but there are indications the fall is ameliorating elsewhere, which suggests all is not lost.

As we can see from the chart, although regional sales are still down sharply, everywhere but Latin America turned up last month. And North America, where Caterpillar derives well more than a third of its construction revenues and total sales, has turned strongly positive. Hey, it's gloomy, no doubt, but I think this is what a bottom looks like.

Caterpillar has some steep walls to scale from the hole it finds itself in, and the concurring opinions from industry peers Deere and Joy Global mean it won't be an easy climb up. But I believe it will start to climb, and that we'll see the sun start to break through once more in 2014.

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