Caterpillar (CAT 0.07%) is dragging on the Dow Jones Industrial Average (^DJI -0.11%) lower after the mining and construction equipment manufacturer reported weaker-than-expected sales in emerging markets. As of 1:20 p.m. EDT the Dow was basically flat at 17,076. The S&P 500 (^GSPC 0.02%) was less than a point above breakeven for the day.
Caterpillar reported mixed second-quarter earnings earlier today. Earnings came in at $1.57 per share, up 4% from the year-ago quarter's $1.45 per share and above analyst expectations of $1.52 per share. If you strip out one-time restructuring costs, earnings were an even stronger $1.69 per share. Looking forward, the company raised its earnings guidance for the year to $5.75-$6.20 per share. Despite the positive earnings, however, Caterpillar is down 3.7%. What gives?
Caterpillar is down today because of its declining revenue and lowered sales forecasts. Revenue came to $14.15 billion, down 3% year over year and below analyst expectations of $14.4 billion. Management lowered its full-year sales forecast from $53 billion-$59 billion to $54 billion-$56 billion. While emerging-market sales were expected to be weak given Caterpillar's previous monthly sales disclosures, investors were still unpleasantly surprised by how weak they were.
The main culprit is Caterpillar's mining equipment sales, which are down 29% worldwide since the prior-year quarter. North America is the one strong region, with mining sales down just 9% and construction sales up 20% year over year. In every other region -- Latin America, Europe, Africa, the Middle East, and Asia -- mining industry sales are down between 35% and 40%. These downtrends are combining to push Caterpillar's trailing 12-month sales down for the sixth consecutive quarter.
I don't expect Caterpillar's sales story to get any better in the short term, as China looks to be facing a credit bubble that should continue to weigh on worldwide growth for some time. With sales continuing to decline, Caterpillar can only cut so many costs. It's hard to justify paying over 17 times forward earnings for a company facing serious headwinds.
There's at least one investor willing to pay that amount, however. Caterpillar announced it plans to repurchase $2.5 billion worth of stock in the third quarter following its purchase of $1.7 billion in the first quarter. By the end of the third quarter, Caterpillar will have purchased more than double the $2 billion purchased in 2013. I worry that Caterpillar is paying a high price for its own shares, destroying value for shareholders. Only time will tell. I plan to be on the sidelines.
