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Caterpillar's July Sales Dip 9%, Shares Fall

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Caterpillar Inc.’s (CAT - Analyst Report) sales slumped for the eighth consecutive month as worldwide sales declined 9% for the three months ending Jul 2013. The news dragged the shares of the construction and mining equipment behemoth down 0.4%.

The Caterpillar sales graph has been trending lower since Dec 2012, hurt by tougher year-earlier comparisons and rising inventories of unsold equipment. Caterpillar had earlier witnessed negative sales growth in Apr 2010 and since then enjoyed a stint of positive growth, benefiting from strong equipment demand both domestically as well as in the emerging markets.

So far in 2013, Caterpillar’s sales declined 4% in January, which deteriorated to 13% in February and 11% in March. The narrower decline of 7% in May sparked some hopes, but it was short-lived as it widened to a fall of 8% in Jun and 9% in July.

In July, Caterpillar witnessed declines across all regions barring Latin America, which was an outperformer with an 11% hike. Demand for construction and infrastructure projects has spurred equipment demand in Brazil as it prepares for the 2014 World Cup and 2016 Olympic Games.

In North America, the company's largest market in terms of geography, the sales decline of 1% in July has improved from the nadir of an 18% decline in April. In Asia, sales declined 28%, the worst performance so far in the year, pulled down by weak demand from China. Sales in EAME were also at its worst in 2013 with a 12% drop compared to single-digit declines in the preceding five months and the 1% climb in January. Sales in ROW (Rest of the World) dipped 13%.

Reciprocating & Turbine Engine Retail sales remained flat year over year globally, a disappointment from the 1% improvement in June. Among the end markets, sales to the transportation sector registered the highest increase so far in the year with a 22% climb. Sales to the industrial markets increased 9% and to the electric power markets increased 5%. The petroleum market however remained in the red with sales dipping 15%.

Caterpillar’s second quarter results were also disappointing as revenues dipped 16% year over year to $14.6 billion and earnings per share slumped 43% to $1.45, primarily due to reduced mining demand and decline in inventory. Citing continued dealer machine inventory reductions during 2013, Caterpillar has trimmed its sales outlook to a range of $56 billion to $58 billion from the previous $57 billion to $61 billion. Caterpillar expects dealers to reduce inventory by about $3.5 billion in 2013. Caterpillar now expects to earn $6.50 per share in 2013, down from the earlier projection of $7.00 per share.

Even though Caterpillar will benefit from the recovery in the U.S. construction sector, the recent loss of sales momentum, declining backlog, negative impact of the European debt crisis and slowdown in economic growth in China remain concerns. Caterpillar currently retains a Zacks Rank #3 (Hold). 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), and CNH Global NV and Lindsay Corporation (LNN - Analyst Report) with a Zacks Rank #2 (Buy).

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