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Caterpillar Stumbles on Sales Drop

Zacks Equity Research

Caterpillar Inc.'s (CAT) shares dipped 1% following its announcement of a 12% decline in global retail sales for the three months ending Nov 2013, with sales dropping in all regions. The drop hovers dangerously close to the year’s lowest drop of 13% that was registered in February. With this, the construction and mining equipment behemoth completed a year of declining sales.

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 the 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 otherwise been the main driver of construction and mining demand.

As mentioned earlier, so far in 2013, Caterpillar had fared the worst in February with a decline of 13%. Since then, the narrower decline of 7% in May sparked some hopes, but it was short-lived as the sales graph again started trending downward and dipped to 12% decline in October and November.

In November, North America, Caterpillar’s largest market in terms of geography, which had registered growth in September, disappointed with a 2% dip. Sales in Latin America dropped 8% in November. The region had enjoyed a 10-month stint of growth, which abruptly ended in Jul 2013. Growth rate escalated to 28% in April this year as demand for construction and infrastructure projects spurred equipment demand in Brazil, with preparations for the 2014 World Cup and 2016 Olympic Games in full swing.

Asia dragged down overall results with a 24% decline and sales in Europe, Africa, the Middle East (:EAME) were at its worst in 2013 with a 16% drop. Sales in the region had dipped in single digits till June. Sales in ROW (Rest of the World) dipped 17%.

Reciprocating & Turbine Engine Retail sales dipped 5% year over year globally. Sales to the industrial markets increased 20% and the petroleum market increased 1%. On the contrary, sales to transportation and electric power markets plunged 17%.

Caterpillar's performancein the first nine months of 2013 has been disappointing as revenues dipped 17% year over year to $41.2 billion, primarily due to reduced mining demand and decline in inventory.

Even though sales in the fourth quarter are expected to be slightly higher than in the third quarter, earnings per share may be lower due to higher costs resulting from seasonal spending patterns. The company also expects another substantial decline in dealer inventories in the fourth quarter. Caterpillar has trimmed its fiscal 2013 guidance for three quarters in a row. For fiscal 2013, Caterpillar now projects sales of $55 billion and earnings of $5.50 per share in 2013.

The recovery in the U.S. construction sector is expected to provide a much needed boost to Caterpillar’s revenues. However, declining backlog, recent weakness in the emerging markets, and negative impact of the European debt crisis could weigh on Caterpillar’s growth and operating performance over the next several quarters. In such a scenario, Caterpillar is looking to curtail costs and get rid of some hindrances by resorting to temporary layoffs, and shutting down or shifting operations.

Caterpillar currently retains a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the retail sector include Kubota Corporation (KUBTY), H&E Equipment Services Inc. (HEES) and Alamo Group, Inc. (ALG). While Kubota carries a Zacks Rank #1 (Strong Buy), Alamo Group and H&E Equipment Services hold a Zacks Rank #2(Buy).

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