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We have maintained our underperform recommendation on Caterpillar Inc. (CAT - Analyst Report), leading manufacturer of construction and mining equipment, given its lackluster first quarter results, trimmed outlook for 2013, weak demand for its mining equipment, recent loss of sales momentum, declining backlog and negative impact of the European debt crisis. Caterpillar retains a short-term Zacks Rank #4 (Sell).

Why Reiterated?

Reduced mining demand coupled with a decline in inventory led to a 45% slump in first quarter 2013 earnings of Caterpillar to $1.31 per share. Revenues declined 17% to $13.2 billion in the quarter. Sales volume decreased $2.671 billion, mainly due to the impact of changes in new machine inventories with dealerships.

Caterpillar remains affected by slowing demand and inventory correction as a result of higher production compared to demand. The biggest challenge will be the continued right-sizing of production volumes to match slowing orders from dealers. Earnings will continue to be affected by lower-than-expected sales and the negative cost impact of continuing low production levels and declining inventory.

Citing weak demand for its mining equipment, Caterpillar trimmed its sales outlook to a range of $57 to $61 billion from the previous $60 to $68 billion. Caterpillar now expects to earn $7.00 per share in 2013, down from the earlier projection of earnings between $7.00 and $9.00 per share.

Caterpillar ended the quarter with a backlog of $20.4 billion, flat compared with at the end of 2012, but a significant decline compared to the end of the first quarter of 2012. Caterpillar will need additional orders during the year to meets its guidance.

Furthermore, Caterpillar’s worldwide sales declined 11% for the three months ending Mar 2013, the fourth consecutive month of declining sales. Caterpillar’s sales growth turned negative in December for the first time in 30 months, hurt by tougher year-earlier comparisons and rising inventories of unsold equipment.

The European debt crisis has 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.

Other Stocks to Consider

Other stocks in the industrial products sector with a favorable Zacks Rank are H&E Equipment Services Inc. (HEES - Snapshot Report), Alamo Group, Inc. (ALG - Snapshot Report),  and CNH Global NV with a Zacks Rank #2 (Buy), all carrying Zacks Rank #2 (Buy).

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