What Caterpillar's Sales Figures Tell You About Its Stock

Caterpillar's latest sales numbers contain lots of useful information, which shareholders in Joy Global and General Electric should keep an eye out for.

Jul 2, 2014 at 9:21AM

In case anyone was in any doubt as to the ongoing bifurcation in prospects between developed and emerging markets, then Caterpillar's (NYSE:CAT) latest monthly sales data will make it clear. Moreover, based on Caterpillar's numbers, investors in the industrial sector should look closely at their stocks' exposure to various industries. As a consequence of what Caterpillar just reported, companies like Joy Global (NYSE:JOY) can expect some varied conditions in the mining sector, and there was even some negative news for General Electric Company (NYSE:GE) in the power generation market. It's time to look more closely.

Caterpillar reports mixed construction trends
The company reports out of three separate industrial segments, and Fools already know that in its first-quarter results in April, Caterpillar upgraded its forecast for full-year construction machinery sales from 5% to 10%. At the same time, it downgraded its view on full-year resource industry sales from a negative to 10% to a negative 20%. Its energy and transportation guidance was left unchanged. Fast forward to the May sales data and a few themes are emerging.

First, there appears to be a strong divergence between Asia/Pacific and North America in terms of construction trends.

Cat

Source: Caterpillar presentations

In addition, according to a Bloomberg research report, China's fixed-asset investment continues to moderate from the torrid pace of growth in previous years.

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Source: Bloomberg

On a more positive note, a commonly followed indicator of U.S. construction conditions, the Architectural Billings Index, is indicating that the U.S. is recovering from the weather affected winter -- good news for those companies with heavy exposure to commercial construction in North America.

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Source: American Institute of Architects

Mining and resources continues to struggle
Caterpillar's resource machinery sales are also indicating a divergence between North American and global prospects. The strength in North America is primarily due to an expected increase in coal production in the U.S. Indeed, Joy Global's CEO, Edward Doheny, recently outlined that he expected U.S. coal production to incrementally rebound this year.

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Source: Caterpillar presentations

But the ongoing weakness in global markets suggests that Joy Global, and Caterpillar -- which only generated 34% of its resource machinery sales from North America in the first quarter -- will continue to struggle in 2014. Joy Global's big hope is that it can increase its service based revenues by servicing more of its own equipment sold to customers.

Power generation sakes weak, a warning for General Electric?
Perhaps the most concerning figure in Caterpillar's sales data was the weakness in its power generation sales.

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Source: Caterpillar presentations

This is obviously a concern for General Electric, particularly as it's in process to acquire the energy assets of Alstom in a bid to consolidate the sector. General Electric intends to generate cost synergies from the deal, but if Caterpillar's figures are indicating the start of a downturn in the sector, then General Electric will find it a lot harder to do so.

The bottom line
All told, Caterpillar's sales numbers are giving a mixed picture. On the one hand, North American construction activity looks to be strengthening -- in-line with Caterpillar raising its guidance for machinery sales to the sector -- but China's fixed asset investment growth continues to moderate. Moreover, China's construction industry is a key component of mining and materials demand, and the last thing the mining industry, and Joy Global, needs right now is a slowdown in China's growth. As a consequence Fools should look to favor U.S.-focused construction plays.

With regard to the power generation figures, it's probably too early to conclude that a trend is in place, so General Electric shareholders need not panic yet, but it's something to keep an eye out for, especially in the light of the situation with Alstom. The general message from the sales figures is that the theme of the developed world's prospects improving relative to the emerging world in 2014 still applies.

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Lee Samaha has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. 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.

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