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Caterpillar misses, cuts view, but says mining has bottomed

The Caterpillar logo is seen on a tractor in Gilbert, Arizona October 20, 2009. REUTERS/Joshua Lott
The Caterpillar logo is seen on a tractor in Gilbert, Arizona October 20, 2009. REUTERS/Joshua Lott

By James B. Kelleher

CHICAGO (Reuters) - Caterpillar Inc posted disappointing quarterly results and cut its 2013 profit forecast on Monday to reflect a drop in demand for heavy equipment from its mining customers.

But the world's largest maker of construction and mining equipment said it believed the pullback in spending by miners was temporary, and its shares rose on news it was reviving a buyback program and would purchase $1 billion in stock this year.

Caterpillar, whose shares have been weighed down for months by concern about the mining sector, is encouraged by "stability" in the construction markets in both the United States and China, said Chairman and Chief Executive Doug Oberhelman.

"We have been watching relatively flat but slightly increasing sales to users for a number of months," he told analysts on a conference call.

Mining equipment is Caterpillar's most profitable product category. Sales to the sector have been hurt in recent quarters because miners, facing investor backlash over unpopular takeovers, budget overruns and falling metal prices, have slashed capital spending, slowing development on some projects and shelving others entirely.

"Investors knew it would be bad, but wanted some quantification from the company," said Adam Fleck, an analyst At Morningstar.

Caterpillar's revised outlook reflects an expected 50 percent decline in sales of its traditional mining trucks and loaders and a 15 percent decline in sales of the draglines made by Bucyrus, the mining equipment company it purchased in 2010.

LOWERED FORECAST

The delayed and cancelled sales from mining companies are hardly a surprise. Caterpillar has warned investors about the weakness in the sector several times, most recently this month, when it laid off 11 percent of its workforce at the Decatur, Illinois, plant that makes mining equipment.

In January, the company also specifically warned that results for the first quarter would be "well below" those posted during the same period last year as dealers, awash in product, tried to sell off existing inventory before placing new orders.

Robert Wertheimer, a principal at Vertical Research Partners, said the drop in mining orders that Caterpillar was experiencing was "in line" with what rivals were seeing. "We met with several competitors last week and they all seem to be having similar experiences," he said. "It's not a (market) share issue at Caterpillar."

The Peoria, Illinois-based company said it now expects to report a 2013 profit of $7 per share on sales of $57 billion to $61 billion. That was down from a previously estimated profit of between $7 and $9 a share on sales of $60 billion to $68 billion.

BUYBACK RESUMES

The news came as the company reported a weaker-than-expected first-quarter profit.

Caterpillar said it earned a profit of $880 million, or $1.31 a share, down from $1.59 billion, or $2.37 a share, in the year-ago quarter.

Analysts had expected the company to report a profit of $1.40 per share. Sales during the period fell 17 percent to $13.20 billion.

Alexander Blanton, a senior analyst at Clear Harbor Asset Management, said Caterpillar's 9-cent EPS miss was "well within the usual plus or minus 10 percent range," typical for the company.

Caterpillar also said on Monday that it would resume a share buyback for the first time in five years.

Larry De Maria, an analyst at William Blair & Co, said Caterpillar's decision to resume the "mothballed" repurchase program was a "positive factor" and probably was contributing to the market's sanguine reaction to the disappointing results and outlook.

Under that plan, which was approved in 2007, Caterpillar could buy back as much as $3.7 billion of its shares before the repurchase authorization expires in December 2015. The company said it would buy $1 billion back in 2013.

CHINA SALES

Oberhelman told analysts during the call that for the first time in three years the company was seeing relative stability around the world.

"We don't want to be overly optimistic but it certainly feels better than the last two springs," he said.

The decline in first-quarter sales was led by a drop in revenue from mining products, which plummeted 23 percent. Sales of construction equipment fell 17 percent and sales of gas and diesel power systems declined 12 percent, the company said.

With mining orders falling, Caterpillar needed a strong rebound from other customers, including residential construction, to offset that weakness.

But that increased demand from builders has not materialized fast enough, in part because some jumped the gun last spring when unseasonably warm weather, combined with signs of the nascent economic recovery in the United States, prompted many construction equipment customers to place orders for new machines.

In the end, the optimism proved to be a little premature, said Eli Lustgarten, an analyst at Longbow Securities.

Clear Harbor Asset Management's Blanton said Oberhelman's optimism about China seemed to be borne out by the company's sales there, which were higher in the first quarter of 2013 than they were in the comparable quarter last year.

Caterpillar shares were up 2.5 percent at $82.42 on Monday afternoon, after dipping 1.2 percent to $79.50 in the morning. The shares have a 52-week high of $108.79 and a low of $78.25.

(Additional reporting by Julie Gordon in Toronto; writing by Patricia Kranz; editing by Maureen Bavdek and Matthew Lewis)

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