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Caterpillar Inc. (CAT - Analyst Report) is reportedly laying off around 300 workers or 40% of its South Milwaukee production work force by June citing lower sales as the reason.

The company stated that various company locations are facing short-term temporary layoffs to bring production in line with demand. Earlier in March, the company announced job cuts at its Belgium plant due to high costs and weak European economy, similar to the strategy adopted by Ford Motor Co. (F - Analyst Report) and ArcelorMittal (MT - Analyst Report) in the region.

Caterpillar’s results have borne the brunt of continued economic turmoil in Europe and its domino effect on the rest of the world. Furthermore, reduced sales, lower production and a decline in inventory primarily resulted in lower fourth quarter 2012 earnings for Caterpillar. Caterpillar remains challenged by slowing demand and inventory correction as a result of higher production than demand.

The downslide in sales continued in 2013 as well with Caterpillar’s worldwide sales declining 13% for the three months ending Feb 2013, the third consecutive month of declining sales. The growth rate has, in fact, worsened from the 4% and 1% dip reported in Jan 2013 and Dec 2012, respectively. 

The situation is not expected to improve in the first quarter of 2013 as Caterpillar expects sales to be significantly lower on an annual basis as dealers are anticipated to continue to lower their new machine inventories. The company foresees earnings to be affected by lower-than-expected sales and negative cost impact of continuing low production levels and declining inventory. For fiscal 2013, sales are expected to be in the range of $60 to $68 billion and earnings between $7.00 and $9.00.

Even though Caterpillar will benefit from the recovery in the U.S. construction sector, the recent slowdown in sales, declining backlog, negative impact of the European debt crisis and a slowing Chinese economy remain concerns. Caterpillar currently retains a short-term Zacks Rank #3 (Hold).

Caterpillar currently retains a Zacks Rank #3 (Hold). In the same industry, Deere & Company (DE - Analyst Report) holds a Zacks Rank #2 (Buy) and is a more favorable option for investors given its exposure to the agriculture sector.

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