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Caterpillar (CAT) July Sales down 9% Yet Graph Crawls Up

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Caterpillar Inc. (CAT) reported a 9% decline in its global retail sales for the three months ending Jul 2014. Even though sales remained in the red, Caterpillar shares gained 0.4% as the graph after going downhill till the 12% decline in May has started to pick up with the 10% decline in June and the recent 9% decline in July.
This nevertheless marks the 20th consecutive month of declining sales for the mining and construction equipment behemoth, replicating its last 20-month stretch of negative sales from Sep 2008 to Apr 2010 due to the global recession. Following that phase, in May 2010, the company rebounded 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, tables turned again since Dec 2012 as sales started slipping, 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%. Caterpillar started 2014 with an 8% decrease in January and February each, but it went further downhill with a 12% drop in March and the 13% reported for April. However, as mentioned earlier, the sales growth decline rate has improved over the past few months, triggering hopes of a recovery.

This July, sales dropped in all regions, while North America was the only saving grace with an 11% increase. Compared with other regions where the declines have worsened, North America has shown considerable improvement in 2014, as evident from the growth range of 1% to 14% reported so far in the year.

Sales in Latin America plunged 23% in July. Sales in Europe, Africa and the Middle East (:EAME) plummeted 16%. Asia/Pacific fared the worst with a 29% slump, as miners continued to cut costs. The descent in the sales trajectory in the region began with a 17% drop in January worsening to 30% in May and June.

Sales in the Resource Industries segment plunged 33% in July, as decline in sales across all regions offset a meager 4% rise in North America. Asia/Pacific again fared the worst with a 50% slump, followed by Latin America and EAME with respective declines of 47% and 44%. This does not come as a surprise as sales in Resource Industries will continue to be affected as mining companies have slashed spending in the face of lower commodity prices.

Sales in Construction Industries remained flat year over year, which was disappointing given that the segment has delivered positive growth ranging from 3% to 9% so far in 2014. North America witnessed a 15% increase which was offset by decline in other parts of the world. Asia/Pacific was down 16% while Latin America was down 14% and EAME was down 2%.

Sales in the Energy & Transportation segment moved south 5%. A 6% increase in the Oil & Gas sector and a 5% jump in sales in the Industrial sector were offset by a 17% plunge in the Transportation sector and 16% decline in sales in Power Generation.

Caterpillar’s second-quarter revenues declined 3% year over year to $14.1 billion, affected by weaker results from the Resource Industries segment due to low end-user demand for mining equipment.  Geographically, North America was the only bright spot with sales increasing as against declining sales in the other regions. Such a trend was again witnessed in July.

Caterpillar, nevertheless, delivered a 17% increase in earnings to $1.69 per share, thanks to its incessant efforts to cut costs, continued deployment of lean manufacturing initiatives and improvement in the Construction segment along with record profit from Energy & Transportation, which helped mitigate the effect of lower mining-related sales on its profits.

Caterpillar revised its 2014 revenue guidance to a range of $54 billion to $56 billion. The company had earlier projected a range of $56 billion, up or down 5%, which translates to a range of $53.2 billion to $58.8 billion. The trimmed guidance reflects lower sales of construction equipment in developing countries.

Though the decline in sales reflects the sluggishness in the mining sector, we believe Caterpillar will weather the storm. The Architecture Billings Index, which is considered a leading indicator of U.S. non-residential construction, rose to a seven-year high in July, indicating an imminent recovery of the U.S. non-residential construction sector. The improvement in the construction sector and macroeconomic stabilization 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 stocks that are worth considering in this sector include Blount International Inc. (BLT), DXP Enterprises, Inc. (DXPE) and IDEX Corporation (IEX). While Blount International sports a Zacks Rank #1 (Strong Buy), DXP Enterprises and IDEX Corporation carry a Zacks Rank #2 (Buy).

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