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Layoffs Continue at Caterpillar

Zacks Equity Research

Owing to reduced global demand for mining equipment and to bring production in line with demand, Caterpillar Inc. (CAT) announced plans to layoff more than 400 employees or about 11% of its work force at its Decatur, Ill., factory.

The Decatur plant manufactures mining equipment. Amid the growing concerns of the sluggish pace of global economic recovery, Caterpillar temporarily retrenched employees in October and shut down parts of its Decatur facility for a week in November and entire month of December due to the fall in demand. However, this time the layoffs are permanent.

This news comes on the back of another job cut by Caterpillar at its South Milwaukee plant. Earlier, in March, the company announced job cuts at its Belgium plant due to high costs and weak European economy, similar to the strategy adopted by Ford Motor Co. (F) and ArcelorMittal (MT) in the region.

Caterpillar previously added production capacity for many of its products. However, with the growing concerns and uncertainty about the pace of economic growth, short-term economic risks in the U.S, the Eurozone debt crisis, and the slowdown in China’s growth, Caterpillar has now opted to be cautious toward acquisitions and expansion investments.  Mining companies such as Vale S.A. (VALE) and BHP Billiton Limited (BHP) also have been revisiting and trimming their capital expenditures plans following the slowdown in economic expansion in China, the world’s largest user of coal and metals. Prices for coal and iron ore have dropped due to slowing growth in China and European debt problems.

Caterpillar’s results have borne the brunt of continued economic turmoil in Europe and its domino effect on the rest of the world. Furthermore, reduced sales, lower production and a decline in inventory primarily resulted in lower fourth quarter 2012 earnings for Caterpillar. Caterpillar remains challenged with slowing demand and inventory correction as a result of higher production than demand.

The downslide in sales continued in 2013 as well with Caterpillar’s worldwide sales declining 13% for the three months ending Feb 2013, the third consecutive month of declining sales. The growth rate has, in fact, worsened from the 4% and 1% dip reported in Jan 2013 and Dec 2012, respectively.

The situation is not expected to improve in the first quarter of 2013 as Caterpillar expects sales to be significantly lower on an annual basis as dealers are anticipated to continue to lower their new machine inventories. The company foresees earnings to be affected by lower-than-expected sales and negative cost impact of continuing low production levels and declining inventory. For fiscal 2013, sales are expected to be in the range of $60 to $68 billion and earnings between $7.00 and $9.00.

Even though Caterpillar will benefit from the recovery in the U.S. construction sector, the recent slowdown in sales, declining backlog, negative impact of the European debt crisis and a slowing Chinese economy remain concerns.

Caterpillar currently retains a Zacks Rank #3 (Hold). In the same industry, Deere & Company (DE) holds a Zacks Rank #2 (Buy) and is a more favorable option for investors given its exposure to the agriculture sector.

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