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Should Investors Consider Caterpillar Despite Mining Weakness?

August 04, 2014 | About:

Machinery giant Caterpillar (NYSE:CAT) released mixed results. The company walked a fine line by posting growth in earnings while its revenue declined. The company expects sales to drop in the second half of the fiscal year as well, which led it to post a weak guidance for the future. This might scare investors away from the stock. Let's take a closer look at Caterpillar's performance and see how it might do going forward.

A look at the quarter

Caterpillar’s revenue declined. It reported a top line of $14.15 billion, which was lower than $14.62 billion a year ago. The company matched analysts’ estimates on earnings, but missed the estimates on revenue as analysts were expecting $14.47 billion.

The mining industry is moving on at a sluggish rate. Things are tough for Caterpillar, but the machinery giant is pleased with the slight increase in earnings despite a challenging market. However, the company is worried about the uncertain growth picture across the globe in the industry.

The road ahead

Moving ahead, Caterpillar is worried about the flat business on the international front. The weakening economies in China and Brazil are putting pressure on its profit margins. The interest rates in Brazil are rising as the country is making advances to improve the economy. These moves are not likely to benefit Caterpillar in any way. Caterpillar is also seeing a decline in its business across China. Dedicated moves by the company toward strengthening the business in China have gone in vain, and it has seen no satisfactory signs of improvement in China.

In Europe, Caterpillar does not see weakness right now, but it does not see development either. Further, the developing macro headwinds in emerging markets are another concern. However, Caterpillar has also seen some positive developments. In North America, its deals expanded 6% because of higher interest in development supplies in the United States.

According to Caterpillar, mining clients are not purchasing new supplies, and are deferring support on the machines they effectively own, which is cutting their part deals. This does not seem good for Caterpillar as sales of mining gear are expected to stay weak going forward. The company, likewise, expects weaker deals in its construction segment, which had formerly been pegged for 10% growth.

Will the situation improve

There are three key things which have helped the company maintain a positive outlook, along with a strong balance sheet. These are - the diversity of its businesses, substantial success in operational improvements through the execution of its strategy, and the strength of its cash flow and balance sheet.

The company is aware of its incapability to command the economy, and hence, it is waiting for a favorable situation to help it execute a turnaround. This is why Caterpillar is maintaining a good level of operational execution, which it believes will help control costs until the economy and the mining industry shows signs of improving in the future.

Shareholder friendly moves

However, Caterpillar is looking forward to benefit shareholders from its share repurchase program. Its agreement with Societe Generale will add more cash and strength to its balance sheet. The repurchase program of about 22 million shares in September is expected to be worth $2.31 billion, which a positive for investors.


With a trailing P/E of 17.12, Caterpillar looks cheap. Also, its forward P/E of 13.97 indicates that its earnings are expected to improve. However, the weakness in the mining industry and the declining sales of Caterpillar across the globe cannot be neglected. With a good dividend payout of 2.60%, the stock could be a good bet. So, investors should tread carefully while investing in Caterpillar, as it might turn out to be a good bet if the situation in the industry improves, or it might falter if things get worse.

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