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On Aug 2, we downgraded Caterpillar Inc. (CAT - Analyst Report), leading manufacturer of construction and mining equipment, from Neutral to Underperform given its lackluster second quarter results, trimmed outlook for 2013, weak demand for its mining equipment, declining backlog and negative impact of the European debt crisis. Caterpillar retains a Zacks Rank #3 (Hold).

Why Downgraded?

Reduced mining demand coupled with a decline in inventory led to a 43% slump in second quarter 2013 earnings of Caterpillar to $1.45 per share and a 16% decline in revenues to $14.6 billion in the quarter. Sales volume decreased $2.545 billion, mainly due to the impact of changes in new machine inventories with dealerships.

Citing lower mining-related sales expectations for the Resource Industries segment and continued dealer machine inventory reductions during the year, Caterpillar trimmed its fiscal 2013 sales outlook to a range of $56 to $58 billion from the previous $57 to $61 billion. Caterpillar now expects to earn $6.50 per share in 2013, down from the earlier projection of earnings of $7.00 per share.

Caterpillar expects dealer machine inventory to decline about $1.5 to $2 billion in the second half of 2013 and inventory will be lower by about $3.5 billion at 2013 end compared with 2012 end. Over the past couple of quarters, orders for mining equipment have been depressed and have been far below than their respective year-ago levels. This led to lower expectations for mining related sales in 2013.

Caterpillar ended the quarter with a backlog of $19.1 billion, down 6% from $20.4 billion as of first quarter end. Caterpillar will need additional orders during the year to meet its guidance.

The European debt crisis had a negative impact on Caterpillar’s results. The continuation of economic uncertainty in the region will continue to be a headwind moving forward. Furthermore, the Chinese economic growth has cooled down from robust levels witnessed over the last decade.

The economic slowdown in 2012 unfavorably impacted infrastructure and construction spending, which impacted sales at Caterpillar. For 2013, Caterpillar expects China's economy to grow 7.5% compared with 7.8% growth registered in 2012. The Eurozone economy is expected to decline 0.5%.

Other Stocks to Consider

Other stocks in the industrial products sector with a favorable Zacks Rank are Alamo Group, Inc. (ALG - Snapshot Report), with a Zacks Rank #1 (Strong Buy), while CNH Global NV , Lindsay Corporation (LNN - Analyst Report), with a Zacks Rank #2 (Buy), are also good options for investors.

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