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 5:39PM

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.

Commons

(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.

Building

(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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 9:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers