Caterpillar Inc. Earnings: Will Construction and Mining Ever Recover?

Caterpillar (CAT 1.82%) will release its quarterly report on Monday, and investors have grown increasingly nervous about whether the heavy-equipment manufacturer will be able to recover from its share-price drop over the past two years. Even though rival Joy Global (JOY) and farm-equipment specialist Deere (DE 0.10%) have also gone through challenging times lately, Caterpillar has taken a double hit from its twin focus on construction equipment and mining equipment.

Caterpillar is a global leader in heavy equipment, enabling other companies to do their work efficiently. But with many of those customers facing huge financial challenges of their own, Caterpillar has seen substantial sales declines, especially in formerly fast-growing areas like the Asia-Pacific region. Meanwhile, the specter of new competition from General Electric (GE 6.91%) in the mining-equipment business will give Caterpillar even more problems to overcome. Let's take an early look at what's been happening with Caterpillar over the past quarter and what we're likely to see in its report.

Source: Caterpillar.

Stats on Caterpillar

Source: Yahoo! Finance.

When will Caterpillar earnings start growing again?
In recent months, analysts have pulled back on their projections for Caterpillar earnings, cutting their fourth-quarter estimates by $0.03 per share and their full-year 2014 expectations by almost 3%. The stock hasn't made much progress, gaining just 2% since mid-October.

Caterpillar's third-quarter report continued a long string of disappointing results for the heavy-equipment maker. Sales fell by more than 18%, sending net income down 44% as the company struggled under terrible conditions in its key markets. Orders for mining equipment from the Asia-Pacific region fell by 63%, as mining companies responded to the plunge in prices for many precious and base metals by delaying or cancelling plans to make big capital expenditures. Caterpillar slashed its full-year guidance yet again, slicing a full $1 per share from its earnings-per-share expectations and lopping off another $1 billion-$3 billion from its revenue guidance, and announced workforce reductions and plant closures to control costs.

Caterpillar still has huge competitive advantages on its side to help it recover when industry conditions improve. With its combined construction and mining equipment line, it has economies of scale that Joy Global can't match, and even though it doesn't have the benefit of major exposure to the agricultural industry that Deere has, Caterpillar nevertheless has the reputation as the top choice for many customers to satisfy pent-up demand whenever those customers get around to spending again.

Caterpillar's share price has gotten low enough that some value-oriented investors are taking notice. Last month, one analyst upgrade pointed to the relative success of Caterpillar's power-systems business, which includes train locomotives as well as gas engines and turbines. That segment has suffered smaller revenue losses than its construction and mining businesses.

The big question for Caterpillar in 2014 is whether activity levels in mining and construction will perk up in 2014. Most investors expect little from the mining sector this year, but early jumps in precious-metals prices could lead to at least a temporary respite from further sales declines in the segment. On the other hand, recent data pointing to sluggish manufacturing activity in China could weigh on Caterpillar's construction business as well as holding back power-systems sales.

In the Caterpillar earnings report, watch for the latest on competition the company is dealing with. Between Joy Global, Deere, and General Electric, as well as Chinese companies that are starting to make better equipment of their own, Caterpillar needs to retain its dominance over the industry in order to take maximum advantage of a rebound when it comes.

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