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The Real Story Behind Caterpillar Inc.'s Big Sales Drop

Just when investors thought the worst was over for Caterpillar (NYSE: CAT  ) , the heavy-equipment company dropped a bomb last week by reporting, for the three months ended in April, the sharpest decline in four years in its retail machinery sales. Aside from its quarterly reports, Caterpillar releases supplementary information about its retail machinery sales every month for the preceding three months on a rolling basis.

Its latest monthly report left investors scratching their heads: Had they jumped the gun when the industry leader beat Street estimates for its first quarter? Should they have, instead, paid closer attention to Deere's (NYSE: DE  ) and Manitowoc's (NYSE: MTW  ) relatively muted construction equipment sales numbers?

All right, I'm going to answer that question right away: yes... and no. No, because knowing that Caterpillar's sales fell 13% for past three months is half the story. Yes, because the sales report indicates deep trouble at its mining business, which doesn't bode well for the company and its investors.

The good and the ugly
Beginning with the good news, Manitowoc's Q1 crane sales may have slumped 14% year over year and Deere's construction equipment sales risen just about 2% in its last quarter, but Caterpillar investors need not worry. Its latest sales report just confirmed the ongoing strength in the construction markets.

Here's a break up of how Caterpillar's three business segments -- construction industries, resource industries (primarily mining), and energy and transportation (previously power systems) -- performed during the quarter ended April versus the comparable period last year.

Business Segment

Direction of Sales

% Change in Sales

Resource Industries



Construction Industries



Energy and Transportation



Source: Caterpillar 

As evidenced in the table above, Caterpillar's construction equipment business had nothing to do with the 13% drop in the company's total sales for the past three months. That's great news, but wait -- that massive 49% drop in its resource industries segment sales should make you sit up.

Other businesses cannot pull Caterpillar out of the low-growth zone if mining equipment sales continue to fall at such rapid pace. And things haven't been as bad as they look now. Here's what Caterpillar said during its last earnings release about its mining equipment business: "Order rates are a fraction of where they were in 2011 and during the first half of 2012, and are substantially below where we believe the long-term sustainable level is."

That sounds ominous.

What's more, Caterpillar's full-year guidance of 20% lower sales from the resource industries division "reflects a drop of about 80 percent in sales of large mining trucks" compared to 2012. For perspective, Caterpillar generated $21 billion worth of revenue from its resource industries division in 2012, compared to only $13 billion last year. And the company is projecting another 20% drop this year. Ouch!

Why you need to worry
The real problem extends well beyond the top line. Analysts that have turned bullish about Caterpillar are betting on increased global construction activity, but do you know that construction equipment is traditionally the company's lowest margin business? Conversely, resource industries contributed most to Caterpillar's operating profits until tables turned last year.

To give you a better idea, here's a simple chart that shows the percentage contribution of each of the three divisions to Caterpillar's combined machinery and power systems (M&PS) revenue and profits in 2011. I've taken the M&PS figuressince they reflect the aggregate total sales of the three machinery business segments and exclude revenue from Caterpillar's financial products segment.

Source: Caterpillar financials. Chart prepared by author

As you can see, Caterpillar's resource industries division made up 40% of its M&PS operating profits despite contributing only 28% to sales in 2011. Conversely, construction industries had a much greater share in revenues but the lowest share in profits at 24%.

The figures for 2012 had a similar story to tell, with resource industries contributing a whopping 45% to Caterpillar's M&PS operating profits compared to construction industries' 19% share.

The pattern continued into 2013. Take a look:

Source: Caterpillar financials. Chart prepared by author

This chart highlights another worrisome point -- construction industries contributed exactly as much to Caterpillar's M&PS sales last year as in 2011, but its share in profits slipped three percentage points to 21%, which was also the lowest among all divisions. Looks like the construction industries segment is under some pressure as well, which certainly isn't good news.

Long story short, the mining business is far more profitable to Caterpillar than construction equipment. The company sure did its own calculations, which is why it spent $8.6 billion to buy out mining-equipment maker Bucyrus International in 2011 in what was one of its biggest deals ever. Unfortunately, the commodities boom ended soon after.

Foolish takeaway
So investors need to pause and think: How far can stronger construction markets take Caterpillar when there's so much at stake in the mining industry? Analysts may have turned bullish about the stock, but I don't see much upside until the mining industry recovers. And if you're wondering about Caterpillar's energy and transportation business, it sure is firing on all cylinders. The graphs above are proof.

But then, why does Caterpillar still expect to end 2014 with lower, or flat at best, revenue over last year despite expecting 10% and 5% higher sales, respectively, from its construction equipment and energy and transportation businesses? Yes, the mining malaise has pushed Caterpillar into a deep hole, and it will have to fight hard and long to crawl out of it. 

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Read/Post Comments (4) | Recommend This Article (7)

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.

  • Report this Comment On June 01, 2014, at 2:41 PM, lm1b2 wrote:

    When i read a article about Caterpillar it reminds me that after Walmart,its the biggest anti-worker,anti-Union company in the USA,i feel sorry for anyone who works for these people !

  • Report this Comment On June 01, 2014, at 3:58 PM, exlonghaul wrote:

    when they HAD to quit making highway engines (EPA regs. it took them down ,,and they'll never return ...

    as an ex longhaul driver , they made the BEST engines on the market ,,would out pull any other engine built ..comparable to Hp rating ...!

  • Report this Comment On June 01, 2014, at 9:12 PM, MaxxTheKatt wrote:

    Our governments complete lack of competent leadership, is destroying our economy. We have two (2) more years of this administrations crash and burn modus operandi.

  • Report this Comment On December 31, 2014, at 12:39 PM, redline35 wrote:

    Exlonghaul, as a retired former Cat assembler (45 plus years) I can tell you Cat engines are now U.S.EPA Tier 4 compliant. "They'll never return"? Never a good idea to bet against Caterpillar!

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Neha Chamaria

Neha has been contributing to since 2011, including a one-year stint at the Foolish Blogging Network. She focuses on materials and industrials sectors, with special interest in fertilizers, chemicals, and heavy-equipment companies. Neha loves decoding 10Qs and 10Ks to dig out information about a company an investor would otherwise not know; and cracking the real reasons behind a stock’s move thrills her. Check back at for her articles, or follow her on Twitter

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