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Caterpillar Inc.'s (CAT - Analyst Report) shares plummeted 3.4% to close at $84.75 on Sep 20 as it announced a 10% decline in global retail sales for the three months ending Aug 2013. With this, the construction and mining equipment behemoth reported its ninth consecutive month of sales decline. Asia recorded its worst show so far this year while North America was the only saving grace with a 1% increase.
Prior to this, Caterpillar had witnessed a 20-month stretch of negative sales from Sep 2008 to Apr 2010 due to the global recession. In May 2012, the company reverted to positive sales growth and sales growth trajectory improved since then, riding on the wave of strong equipment demand both domestically as well as in the emerging markets.
However, the sales growth again started declining in Dec 2012, hurt by tougher year-earlier comparisons, rising inventories of unsold equipment, weak economic conditions, and slowing down of the Chinese economy, which had otherwise been the main driver of construction and mining demand.
So far in 2013, Caterpillar had fared the worst in February with a decline of 13%. The narrower decline of 7% in May sparked some hopes, but it was short-lived as the sales graph again started trending downward and June reported an 8% fall, which further deteriorated to 9% in July and 10% in August.
In August, Caterpillar witnessed declines across all regions barring North America, its largest market in terms of geography. Sales edged up a meagre 1%. Nevertheless it was an improvement as it reversed the spate of declines suffered in the past eight months.
Latin America, which so far in 2013 outperformed other regions with positive growth in contrast to decline across the board, disappointed with a 3% sales dip. This ended its positive run for the last 10 months. Growth rate had escalated to 28% in April this year as demand for construction and infrastructure projects had spurred equipment demand in Brazil, as it prepares for the 2014 World Cup and 2016 Olympic Games. However, civil unrest in Brazil affected sales in the region in August.
Asia dragged down overall results with a 30% decline, the worst performance so far in the year. Sales in EAME were also at its worst in 2013 with a 12% drop, flat with July. Sales in the region had dipped in single digits till June and had posted a 1% climb in January. Sales in ROW (Rest of the World) dipped 17%.
Reciprocating & Turbine Engine Retail sales dipped 6% year over year globally, a disappointment from the 1% improvement in June and flat year over year sales reported in July. Sales to the industrial markets increased 7% and to the electric power markets and transportation increased 5% each. The petroleum market however continues to remain in the red with sales dipping 21% - the weakest performance in 2013.
Caterpillar's results in the first half of 2013 has been disappointing as revenues dipped 17% year over year to $27.8 billion, primarily due to reduced mining demand and decline in inventory. Citing further 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.
However, China’s recent data that suggest that its economy is showing some positives offer some hope to Caterpillar. To elaborate, China’s industrial production grew 10.4% in August, 0.7 percentage point higher than that in July.
Export growth has been a major component supporting China's rapid economic expansion. Exports rose 7.2% in August, up from 5.1% in July and the 3.1% drop in June. China’s manufacturing Purchasing Managers Index (PMI) reached a 16-month high of 51.0 in August, up from 50.3 in July, beating market expectations.
A reading above 50 indicates an expanding economy. This is positive news for Caterpillar as the company will once again benefit from the renewal in demand for construction and mining machinery in China.
A recovery in the U.S. construction sector will also drive revenues in the domestic front. The Federal Reserve’s unexpected announcement to maintain its quantitative easing program for keeping interest rates low will provide support to the homebuilding sector. However, declining backlog, recent weakness in the otherwise outperforming Latin American market, and negative impact of the European debt crisis remain overhangs.
Caterpillar currently retains a Zacks Rank #3 (Hold). Other stocks in the industrial products sector with favorable Zacks Rank are Alamo Group, Inc. (ALG - Snapshot Report), with a Zacks Rank #1 (Strong Buy), and AGCO Corp. (AGCO - Analyst Report) and Lindsay Corp. (LNN - Analyst Report), with a Zacks Rank #2 (Buy).