Caterpillar Inc.'s (CAT) shares dipped 0.18% following its announcement of an 8% decline in global retail sales for the three months ending Feb 2013, with sales dropping in all regions, barring North America. The drop however remains flat compared with January but marks the 15th month of declining sales for the construction and mining equipment behemoth.
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 2010, the company reverted to sales growth and there was no looking back as sales picked up on strong equipment demand both domestically as well as in emerging markets.
However, sales started declining since Dec 2012, affected by tougher year-earlier comparisons, rising inventories of unsold equipment, weak economic conditions, and slowing down of the Chinese economy, which had earlier been the main driver of construction and mining demand.
In 2013, the monthly sales decline rate ranged from 4% to 13%. North America, Caterpillar’s largest market in terms of geography, fared better with a 2% increase in February. Sales in Latin America dropped 16% in November. The region had enjoyed a 10-month stint of growth, which abruptly ended in Jul 2013.
Asia dragged down overall results with a 17% decline while sales in Europe, Africa and the Middle East (EAME) declined 9%. Sales in ROW (Rest of the World) dipped 8%.
Sales in the Resource Industries segment plunged 37% in February, as sales dipped across all regions. Asia/Pacific fared the worst with a 55% slump, followed by Latin America, North America and EAME with respective declines of 49%, 24% and 19%. This does not come as a surprise as sales in Resource Industries will continue to be affected as mining companies keep reducing their capital expenditures in 2014.
Sales in Construction Industries was the bright spot, increasing 9%, triggered by increase in all regions except EAME. Latin America outperformed the other regions with a 16% climb, followed by North America (up 13%) and Asia Pacific (up 11%). EAME sales declined 2%.
Sales in the Energy & Transportation segment edged up 2%. A 28% increase in sales in the Industrial sector and a 17% in the Power generation sector was offset by a 10% decline in sales in the transportation and Oil & Gas sectors.
Caterpillar had earlier announced plans to change its organization of dealerships. It will now focus on 10 metrics and underperforming dealerships will be subject to a strategy discussion and development of a plan to perk the performance up to a targeted level. Through this drive, Caterpillar expects to improve revenues at the dealer level by $9 billion to $18 billion over the next 4 years.
Caterpillar expects revenues in 2014 to remain flat with 2013 or move up or down in a 5% range, and earnings per share at $5.85 per share, reflecting 2% annual growth. Construction Industries and Power Systems revenues are expected to deliver sales growth, driven by better economic development. Caterpillar will also benefit from the recovery in the construction sector and macroeconomic stabilization in Europe. Management also expects a number of smaller acquisitions in 2014, in its Energy & Transportation segment.
Caterpillar has initiated extensive cost-saving programs across its global businesses. The company will continue to benefit from its additional restructuring actions in 2014 to optimize its cost structure and improve its operational efficiency. Even though extensive restructuring actions have long-term benefits, they will impact profitability in 2014.
Caterpillar currently retains a Zacks Rank #3 (Hold). Some better-ranked stocks that are worth considering in this sector include The Manitowoc Co., Inc. (MTW), Alamo Group, Inc. (ALG) and Komatsu Ltd. (KMTUY), both of which carry a Zacks Rank #2 (Buy).
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