Caterpillar Inc. (CAT) Earnings Preview: Q4 2013 Sales Fall On Continued Mining Sector Lag

Caterpillar Inc. (NYSE:CAT), the world’s largest producer of mining and construction equipment, will report a 12.3 percent drop in fourth-quarter earnings due to high dealer inventories and low global demand for mining equipment, which can’t be offset by recent cost-cutting measures or a flat growth in its construction segment.

When the Peoria, Ill.-based company announces fourth-quarter earnings on Monday before markets open, it will likely report a net income of $826 million, or $1.28 per share, on revenue of $13.64 billion based on the average estimate of analysts polled by Thomson Reuters.

In the same period a year earlier, net income was $977 million, or $1.46 per share, on $16.08 billion in revenue.

The manufacturer in the third quarter lowered its outlook for all of 2013, revising sales and revenue predictions down to $55 billion from $64 billion. This represents a 16.6 percent drop from its revenues of $66 billion in 2012.

Analysts at Morgan Stanley forecast a 50 percent fourth-quarter revenue decline year over year due primarily to the resource sector. Though the company is attempting to control its inventory problems, “we believe this will be a long and arduous process,” the note read.

It’s been a bad year for mining in general, and recent months haven’t been better. Companies have stopped opening new operations and ordering new equipment, which will hurt revenues in the fourth quarter.

In a note, Wells Fargo analysts wrote that Caterpillar “continued to encounter difficult market conditions, driven by weaker mining equipment and construction equipment demand,” and lowered their earnings guidance down to $1.30 per share from $1.56.

In October, Caterpillar management forecast a 40 percent drop in their resource sector, which is mainly mining, for all of 2013.

Caterpillar doesn’t sell its products directly to companies or customers but to dealers who build up their own stock to sell in the future. When the industry started to slow in 2012, dealers had purchased more equipment than demand required, which created excess inventory. At the end of the third quarter, backlog was $19.1 billion, down from $23.1 billion for the same quarter a year earlier.

At a Dec. 4 conference, Mike DeWalt, Caterpillar’s vice president of strategic services, told analysts that the company is making a variety of changes to help lower expenses.

“We really started in earnest with that in the second quarter, did more in the third quarter and there is more coming in the fourth quarter,” he said.

When they last reported earnings on Oct. 23, worldwide full-time employment for Caterpillar was 121,506 in October, down 7,607 since the year before.

On Oct. 30, Caterpillar announced that a plant in Kilgore, Texas, would be closed by the year’s end. Over the course of the entire year, roughly 90 percent of employees took three weeks of paid leave. Meanwhile, De Walt said at a presentation in December that a “large chunk of production” was moved from Australia to Thailand, affecting about 200 people.

“In and of itself that one item is not massive,” he said.

“The cost reductions that we’re doing across the company in a lot of ways are like that, it’s many, many actions spread across the company. It’s allowed us this year to actually get pretty good cost reduction.”

Analysts from Zacks Equity Research updated their rating of Caterpillar stock to neutral on Jan. 17, citing these and other cost-cutting efforts as a major reason.

Caterpillar also has a large construction segment. Though its revenues are likely to decrease again, it won’t be as severe a loss as other sectors.

While the resource industries sector revenues dropped by 42 percent last quarter since the year earlier, construction sales lost only 7 percent.

“The construction group, which underperformed through the first half of 2013, gained momentum in anticipation of a recovery in non-residential construction in the U.S., and finished the year up 41 percent, ahead of the broader market,” reads a note from J.P.Morgan analysts.

Though this segment remains at risk, it makes them “more optimistic about the outlook for CAT,” for the quarter and the year, despite the general underperformance of the machinery sector in 2013.

Morgan Stanley analyst Nicole DeBlase wrote in a note on Tuesday that she is “skeptical” about Caterpillar’s 2014 outlook “given the potential for mining end user demand to take another leg down, as growth projects roll off.”