Downslide in Cat Sales Continue (CAT) (DE) (F) (MT)

The year 2013 has so far been inauspicious for construction and mining equipment behemoth, Caterpillar Inc. (CAT) as worldwide sales declined 13% for the three months ending Feb 2013, the third consecutive month of declining sales following a disappointing fourth quarter 2012 results. This news led to Caterpillar shares sinking 2%.

The growth rate has, in fact, worsened from the 4% and 1% dip reported in Jan 2013 and Dec 2012, respectively. Caterpillar sales started its downhill journey in 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.

In Feb 2013, Caterpillar witnessed declines across all regions barring Latin America, which held its own with 3% growth. Sales dropped 12% annually in North America, the company's largest market in terms of geography. In Asia, a weak construction equipment market in China and falling demand for mining equipment led to a 26% decline, further exacerbating from the 7% decline in Dec 2012 and 12% in Jan 2013. Sales in EAME registered a drop of 9% and ROW (Rest of the World) sales plummeted 13%.

Investments in infrastructure construction and mining in China, Australia and other developing economies have spurred the demand for Caterpillar's machinery, thereby contributing to brisk growth in Asia/Pacific so far. However, of late, China’s attempts to fight inflation have affected Caterpillar’s sales in the region.

In Reciprocating & Turbine Engine Retail Statistics, sales went down 7% year over year globally, flat compared with three months ending Jan 2013 but deteriorating from the 2% dip in the Dec 2012 period. Among the end markets, sales to the transportation sector were the only bright spot with 15% growth. Other markets remained in the red with the industrial sector being the worst affected with a 25% decline followed by Electric Power and petroleum sector, both dipping 8% each.

Caterpillar’s fourth quarter results were also disappointing with revenues declining 7% to $16.1 billion due to the impact of changes in dealer new machine inventories – the first quarterly revenue drop since the March 2010 quarter. Among the regions, sales growth in Latin America was the only saving grace.

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 the 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.

Caterpillar remains affected by slowing demand and inventory correction as a result of overproduction compared to demand. Caterpillar is struggling to bring production under control.

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 a slowing Chinese economy remain concerns.

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