Caterpillar (And Rivals) Feel Squeeze From China Slowdown

There have been few better ways to track the pessimism surrounding the China slowdown story than the declining value of shares of Caterpillar Inc. (NYSE: CAT), the world's largest maker of construction and mining equipment.

The Peoria, Ill.-based company has seen its stock shed 25 percent in value from its late-February highs, while the broader market gained roughly 5 percent over the same period.

During their quarterly earnings conference call with analysts, companies like Caterpillar -- which reduced the high end of its revenue guidance for 2012 by $2 billion -- have started referring to the Chinese market as a headwind instead of a growth driver.

Japan's Komatsu Ltd (TYO: 6301), the world's second-largest maker of construction equipment, reported China sales fell more than 50 percent on the year and cut its annual profit outlook by 17 percent.

Sany Heavy Industry Co., LTD (SHA: 600031), China's biggest maker of excavators, lowered its sales forecast for the equipment, citing lower demand. Excavator sales may increases 10 percent this year, slower than a previous target of 40 percent, Vice Chairman Xiang Wenbo said in a July 11 interview with Bloomberg.

Cummins Inc. (NYSE: CMI) also lowered its full-year revenue outlook for 2012 and now expects 2012 revenues to be in line with 2011, compared to the company's previous guidance of an increase of 10 percent, according to a July 10 statement.

China's economy expanded 7.6 percent in the second quarter from a year earlier -- the weakest growth in three years and the sixth straight deceleration. Year-on-year growth in fixed asset investments has slowed from a peak of more than 33 percent in the summer of 2009 to 20.1 percent so far this year.

Meanwhile, the Chinese government's measures to cool an overheated housing market have weighed on consumer and industrial demand.

Data released Tuesday showed China excavator sales in July came in at 5,886 units -- the lowest since January, the month of the Chinese New Year holiday.

Industry sales were down 23 percent from the year-ago period and down 29 percent sequentially -- the 15th straight monthly decline.

"We expect double-digit declines to continue for the remainder of 2012," William Blair & Co. analyst Lawrence De Maria, wrote in a note to clients on Tuesday. "Forty percent of industry sales typically occur during the spring selling season, and, thus, the key determinant of a market upturn is now pushed into next year."

China makes up 10 percent of Caterpillar's business in Asia and 3 percent of its overall sales. Caterpillar's China operations have fuelled its profits in recent years as demand has been sluggish in developed economies, but the recent development has reversed that trend.

The manufacturer warned that it had overestimated Chinese demand for construction equipment, saying that its inventories in the country were so high that it would export 2,300 excavators from China to other developing countries. It is also reducing production in China.

"The [Chinese] construction equipment industry remains very weak, and it really hasn't shown much in the way of signs of improvement yet," Mike DeWalt, Caterpillar's head of investor relations, said during a July 25 earnings conference call with analyst. "In addition to the weak demand, there is still quite a bit of inventory available on the ground in China."

"We've already lowered production in China and expect to reduce it even more in the third quarter. That along with the higher level of exports from China to other parts of the world should help lower inventory there," DeWalt added. "However, because the sales volume levels in China haven't begun to improve much, we expect it will take a couple of more quarters to get inventory levels in China where we like them to be."

As demand from China deteriorates, the U.S. became the pillar of strength for Caterpillar. Caterpillar's second-quarter earnings rose 67 percent and topped analysts' estimate largely due to strong U.S. demand from construction fleets upgrading or replacing older equipment.

Shares of Caterpillar Inc. (NYSE: CAT) rose 1.89 percent, to $87.98 a share, in Tuesday's afternoon trading.