Why Haven't Caterpillar's Wings Fluttered?

Caterpillar's (NYSE: CAT  ) fiscal third quarter results released last week did not make for good reading. The company noted revenue and income declines across all divisions. In addition, the company reported that it was revising its full-year profit forecast down by $1 per share to $5.50, from $6.50 previously. What's more, the company reported that revenues from its resource industries division, which is principally engaged in the manufacture of mining equipment, collapsed 75% year-on-year. 

Unfortunately, Caterpillar has reported a pickup in mining sector activity during the past few months, but this has not translated into an increase in demand for the company's equipment. That said, Caterpillar's reported order backlog for the end of the third quarter remained constant at $19.1 billion. This was similar, to the figure reported at the end of the second quarter as a rise in construction equipment orders offset weakness within the resource industries sector .

Still, weakness within the mining sector is expected to continue for the next few years as rising costs and falling commodity prices pressure miners. Indeed, according to data released by Macquarie Commodities' Research at the beginning of this year, mining capital spending, or CapEx, is expected to decline 20% during the year . Macquarie also expects further CapEx cuts during 2014 and 2015, before a slight recovery during 2016.

Actually, mining CapEx is declining faster than originally thought. In particular, during 2012 JPMorgan analysts predicted that global mining CapEx would decline 14% from a high of $136 billion during 2012, to $117 million annually by 2014. However, global mining CapEx is estimated to be around $100 billion this year, a 26% decline already .

No escape
Caterpillar is lucky as the company is able to offset declining CapEx in the mining sector with increased sales to the construction sector. Joy Global (NYSE: JOY  ) is not so lucky. Within the company's fiscal third quarter results, Joy reported a 36% decline in new-order bookings. What's more, the company's order backlog declined 27% from the previous quarter as Joy worked through existing orders.

Joy produces equipment mainly designed for coal mining, and with multi-billion dollar coal projects being shelved thanks to soft coal prices, it doesn't look as if there will be any let-up for Joy's declining earnings anytime soon. Indeed, according to GlencoreXstrata, the world's largest thermal coal exporter, 30% of seaborne thermal coal production is cash-cost negative. This has caused the company to shelve its $7 billion Wandoan coal project in Queensland, Australia .

Opportunistic
Having said all of that, I feel that Joy has made the right choice by authorizing a $1 billion stock repurchase program within its fiscal third quarter results. Poor mining forecasts have pressured Joy's share price, which should enable the company to buyback more stock with its authorization, ultimately increasing the company's performance in the future .

Getting off lightly
One company that is not feeling the pinch to the same degree as Joy is Swedish engineering group, Sandvik (NASDAQOTH: SDVKY  ) . Sandvik recently reported a stronger than expected fiscal third quarter. Net profit beat expectations by 5%, and the company reported that order intake was down only 7%, with mining order intake down around 9%.

Surprisingly, Sandvik's order backlog for its mining equipment declined less than that of both Joy and Caterpillar, which indicates that the company is in a better position to ride out the collapse in mining CapEx than its peers . That said, Sandvik has other problems, namely the strong Swedish Kronor and rising metals prices, which hit operating profit to the tune of 250 million and 90 million kronor respectively during the fiscal third quarter, this was roughly 14% of quarterly operating profit .

Foolish summary
So overall, capital spending within the mining sector is declining rapidly and faster than originally thought. However, Caterpillar and Sandvik are well placed to ride out this decline. Joy on the other hand is not so lucky and the company is really suffering. That said, Joy's management has taken the prudent decision to buy back stock while interest rates are low and this should boost future earnings.

Should you invest in coal's rival?
Natural gas production has been the arch nemesis of coal lately. For this reason, the Motley Fool is offering a comprehensive look at three energy companies that could help you take advantage of this growing energy boom. We invite you to find out which three companies are spreading their wings by checking out our special free report, "3 Stocks for the American Energy Bonanza." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2707546, ~/Articles/ArticleHandler.aspx, 10/21/2014 11:52:19 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement