Caterpillar (CAT 0.05%) and its Japanese rival Komatsu are the two leading players in the global construction and mining machinery markets. Therefore, what one of them says about its end markets has direct relevance to what the other will report. Consequently, Caterpillar investors have reason to feel positive about trading in the company's third quarter. Here's why.
How Caterpillar makes money
Caterpillar is best known for its highly visible construction machinery. Still, a quick look at a breakout of its industrial segment profit shows that its resource industries (mining and aggregate machinery) and energy and transportation segments together produced profits equivalent to its construction industries segment.
In addition, note that the profit increase in the resource industries segment is more than half the increase in the construction industries segment from 2021 to 2022 -- a reflection of the cyclicality of the resource industries segment and just how much the segment can improve profitability when its end markets are in good shape.
|
Caterpillar Segment |
2021 Profit by Segment |
2022 Profit by Segment |
Change |
|---|---|---|---|
|
Construction industries |
$3,732 million |
$4,743 million |
$1,011 million |
|
Resource industries |
$1,229 million |
$1,827 million |
$598 million |
|
Energy and transportation |
$2,804 million |
$2,804 million |
$3 million |
Data source: Caterpillar 10-K SEC filing.
What Komatsu's management recently said
Komatsu competes directly with Caterpillar in construction and mining machinery, and its CFO, Takeshi Horokoshi, recently told the Japanese newspaper Nikkei that "there is no indication that demand for mining equipment is slowing down." Consequently, he indicated that profit growth would be more than previously forecasted for 2023 with the company pushing through price increases this year in response to buoyant markets.
This obviously bodes well for Caterpillar's mining machinery sales in the third quarter.
More on that in a moment. But first, it's worth recapping what Komatsu said regarding full-year guidance on its second-quarter earnings presentation at the end of July, because it has good implications for Caterpillar.
Image source: Getty Images.
Komatsu's full-year guidance
The Japanese company gives impressive detail with its guidance and breaks it out by geographic end markets and mining equipment sales. It's useful information for Caterpillar investors.
As you can see below, the guidance for overall demand for construction and mining equipment in North America hasn't changed through 2023 so far, and neither has the guidance for mining equipment. In fact, Horokoshi's recent remarks suggest a strengthening in mining machinery demand.
On the other hand, overall demand has notably weakened in Europe and China, according to the trend in Komatsu's guidance.
|
Komatsu Full-Year Guidance (YOY Demand Growth) |
In April |
In July |
|---|---|---|
|
Demand in North America |
Down 5% to flat |
Down 5% to flat |
|
Demand in Europe |
Flat |
Down 10% to down 5% |
|
Demand in China |
Down 20% to down 10% |
Down 40% to down 30% |
|
Demand for mining equipment |
Flat to up 10% |
Flat to up 10% |
Data source: Komatsu presentations. YOY = year over year.
What it means to Caterpillar investors
If Komatsu's commentary on mining machinery end markets is correct, then Caterpillar could be set for an excellent year in its resource industries segment. Meanwhile, Caterpillar's energy and transportation segment (oil and gas, power, and industrial reciprocating engines, turbines, and compressors, alongside diesel-electric locomotives in transportation) should see solid demand from buoyant energy and power end markets.
All of which leaves the construction industries. Here, it's somewhat mixed. North American demand conditions are stable, but according to Komatsu, conditions are getting worse in Europe and China. Together, Europe, Africa and the Middle East (EAME) and Asia/Pacific (which includes China) contributed around 36% of Caterpillar's construction industries sales in the second quarter, and it's fair to say there could be pressure on the overall segment.
|
Caterpillar Construction Industries Sales |
Full Year 2022 |
Share |
Second Quarter 2023 |
Share |
|---|---|---|---|---|
|
North America |
$12,367 million |
49.2% |
$3,968 million |
55.7% |
|
Latin America |
$2,843 million |
11.3% |
$566 million |
7.9% |
|
Europe, Africa, the Middle East, and CIS* |
$5,099 million |
20.3% |
$1,438 million |
20.2% |
|
Asia/Pacific |
$4,818 million |
19.2% |
$1,149 million |
16.1% |
Data source: Caterpillar SEC filings; *CIS = Commonwealth of Independent States.
What's next for Caterpillar
The global economy is going through some cyclical weakness right now, and it's hard to think Caterpillar won't be negatively impacted too. That said, the strength of mining machinery and stability, for now, in construction in North America suggest Caterpillar is an industrial company that's relatively well positioned to handle it while it waits for a lower interest rate environment to boost growth.
