Caterpillar November Sales Dip, Marks Two Years of Decline - Analyst Blog

Caterpillar Inc. (CAT) reported a 10% decline in its global retail sales for the three months ending Nov 2014, due to weak mining demand. Latin America dragged down results due to weakness in the Brazilian economy followed by Asia/Pacific, as the Chinese economy played a spoilsport.

24-Month Stretch of Declining Sales

November marked the 24th consecutive month of declining sales for Caterpillar, worse than the previous 20-month stretch of negative sales reported from Sep 2008 to Apr 2010 due to the global recession. This time, sales growth were in the red since Dec 2012, affected by rising inventories of unsold equipment, weak economic conditions and slow down of the Chinese economy, which had earlier been the main driver of construction and mining demand.

Trend So Far in 2014 and November Results

Caterpillar started 2014 with an 8% decrease in sales both in January and February, and went further downhill with a 12% drop in March and 13% in April. Within the May-July timeframe the trend displayed minor improvement with a drop of 12% for May, 10% for June and 9% for July, triggering hopes of a recovery.

However, hopes were soon dampened with sales again dipping 10% in August. Since then, the drop has stalled between the 9% to 10% range. In October, sales had dropped 9%.

In November, the sales drag was mainly due to Latin America and Asia Pacific. North America performed better with a 5% increase while EAME was flat. So far this year, North America has been delivering positive growth. The rate of growth, however, has declined from the peak 14% growth witnessed in May and June this year. Sales in Latin America plunged 37% in November, the worst performance so far in the year while Asia/Pacific slumped 24%.

Overall sales in Resource Industries were down 23% with sales in the red across all regions. This does not come as a surprise since sales in Resource Industries will continue to be affected as mining companies have slashed spending in the face of lower commodity prices. Latin America fared the worst with a 51% slump, followed by Asia/Pacific with a decline of 33%. Sales in North America dipped 8% and in EAME it went down 3%.

Sales in Construction Industries were down 6% year over year. After delivering positive growth during most of 2014, the segment's sales growth slipped into the negative territory since August. The 6% decline in sales in November is the worst performance so far in the year. North America witnessed an 8% increase while EAME was up 1%, which was offset by decline in other parts of the world. Latin America and Asia/Pacific were down 31% and 20%, respectively.

Sales in the Energy & Transportation segment moved north 11%. A 57% jump in the Transportation sector, 9% rise in the Oil & Gas sector and 2% increase in Power Generation sector were somewhat offset by a 3% decline in sales in Industrial. It is worth mentioning that the Transportation sector has shown considerable improvement delivering growth in sales compared with a decline in the range of 1% to 25% in the first half of the year.

Caterpillar Continues to be Affected by Weak Mining

Over the past two years, Caterpillar's mining customers have slashed capital spending in the middle of a glut in capacity, drop in prices for coal, iron ore and other metals and slower economic growth in China and other developing countries. This bearish phase of the mining market has dealt a blow to Caterpillar's long-term objective of becoming a dominant global player in the mining space.

Prior to this, Caterpillar, had been riding the wave of heightened construction and mining activity in developing markets, triggered by the demand for coal, copper and iron ore. The company also started aggressively expanding in mining when the market was stronger. Its acquisition of Bucyrus in 2011 for $8.8 billion was an attempt to be a leader among the global mining original equipment manufacturers with the buyout resulting in the most expansive product offering in the mining equipment industry.

Even though Caterpillar's competitor, Joy Global Inc. (JOY) recently reported a 13% rise in its fourth-quarter earnings, it guided 2015 below expectations as its customers continue to struggle with lower prices amid an oversupply of coal and steel and slowing demand for iron ore. These have been the aftermath of a slowdown in manufacturing and construction overseas.

Improvement in Construction and Europe is the key

We believe Caterpillar will weather the storm as improvement in the construction sector and gradual improvement in Europe will somewhat help compensate the impact of the weak mining sector. Furthermore, Caterpillar has initiated extensive cost-saving programs across its global businesses. The company will continue to benefit from additional restructuring actions in 2014 to optimize its cost structure and improve operational efficiency.

Caterpillar currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector worth considering include Alamo Group, Inc. (ALG) and Lindsay Corporation (LNN), both sporting a Zacks Rank #1 (Strong Buy)..