Will This Industry Shift Take Caterpillar and Joy With It?

The mining industry has shifted from growth to efficiency, and that could give equipment makers like Caterpillar and Joy indigestion.

Jun 11, 2014 at 1:39PM

After years of growth at any cost, mining companies are facing low commodity prices and something of a forced austerity shift. Over the near term, that's meant lower sales for key suppliers like Caterpillar (NYSE:CAT) and Joy Global (NYSE:JOY). Longer term, it might have even bigger implications.

A slimming giant
BHP Billiton (NYSE:BHP) has gone on a diet. It plans to cut its capital spending by as much as 25% this fiscal year, with more cuts on tap for 2015. This move is backed by the company's focus around a smaller number of core markets (iron ore, copper, coal, and oil and natural gas) and around its best properties. In fact, the EBIT margin on its core properties is around 10 percentage points better than the company's overall average.

By focusing on such opportunities, BHP can make investors more money with less spending. The company is far from alone in this effort, too. In fact, Edward Doheny, CEO at Joy Global, noted at the start of the year that, "In the last 24 months, we've seen over 25 new CEOs at mining companies take over with a focus on cost reduction and returns to shareholders after years of focus on growth and investment." Ironically enough, Joy Global's Doheny himself has only recently been granted the CEO title.


(Source: Joy Global, via Wikimedia Commons)

BHP truly represents the changing trends in the mining industry. However, it goes deeper than the "big picture" of cutting capital spending. Miners are looking at every expense and asking if they can save some money. Right now that means holding off on big projects, and that means holding off on big purchases like the machines that Joy and Caterpillar sell.

Joy Global and Caterpillar get a punch to the gut
On that front, Joy Global saw its mining equipment sales fall roughly 11.5% in fiscal 2013 (years end October) with bookings down nearly 23%. The latter paints a bleak picture for future sales. Caterpillar's review of its 2013 performance started with: "As we look back on 2013, it was a year overshadowed by a substantial decline in sales of relatively high margin mining products." Management went on to note that the decline was worse than expected. Following another weak performance in the first quarter, Caterpillar now expects a 20% mining equipment sales decline in 2014.

That said, in its fiscal first quarter conference call, Joy Global's Doheny said, "We are seeing signs of improvement in our service business as commodity production picks up. While commodity prices remain range-bound, the ability to delay rebuilds and service in most regions appears to be nearing a conclusion." Service bookings were up 4% year over year.

Services, including replacement parts, is one of the key reasons that Caterpillar expanded into the mining sector with purchases like the nearly $8 billion turn-of-the-decade acquisition of Bucyrus. Essentially, mining equipment wears out quickly, making selling replacement parts a reliable aspect of an otherwise cyclical business.


(Source: Pavel Ševela, via Wikimedia Commons)

The rub
However, with miners looking at every cost, buying direct from manufacturer like Caterpillar and Joy Global may not be as common in the future as it has been in the past. You know exactly why: When you go back to your car dealer for service, you pay more than you would if you went to the local independent mechanic. The parts and the labor cost more because they are "approved" by the company that made the equipment to begin with.

While that has some value, miners pressed for profits may decide that it isn't enough to warrant going back to Joy Global or Caterpillar for parts and service. That could leave both companies with weaker service sales than they have historically enjoyed. This would make future profit margins, and profits, smaller than investors hope.

The big picture for Joy Global and Caterpillar is new product sales, and you need to keep a close eye on that metric. However, don't forget to monitor this pair's parts and services businesses. If the retrenching mining industry shifts gears there as well, the long-term prospects for Caterpillar and Joy Global will be weaker than you might expect.

Say goodbye to "Made-in-China"
"Made in China" -- an all too familiar phrase. But not for much longer: There's a radical new technology out there, one that's already being employed by the U.S. Air Force, BMW and even Nike. Respected publications like The Economist have compared this disruptive invention to the steam engine and the printing press; Business Insider calls it "the next trillion dollar industry." Watch The Motley Fool's shocking video presentation to learn about the next great wave of technological innovation, one that will bring an end to "Made In China" for good. Click here!

Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information