Caterpillar Growth Is Seen Slowing as World Expansion Dims

After Caterpillar Inc. (CAT)’s heady post- recession expansion, the world’s biggest construction and mining equipment maker will probably forecast the slowest sales growth in four years as its prospects for 2013 fade with the decelerating global economy.

The manufacturer, an economic bellwether, is expected to project next week that revenue will increase 5.1 percent in 2013, according to the average of 17 analysts’ estimates compiled by Bloomberg. That compares with year-over-year growth of 31 percent in 2010, 41 percent in 2011 and an estimated 13 percent this year.

Chairman and Chief Executive Officer Doug Oberhelman has expanded factories and announced deals for about $10.3 billion in the past two years to meet demand from mining companies and North American builders, and to position the company to become the “market share leader” in China by 2015. His plans have hit a snag on rising machine inventories as the European debt crisis persists and expansion decelerates in emerging markets from China to Brazil.

“The problem is he was sizing his business model for long- term global growth,” Stephen Volkmann, a New York-based analyst at Jefferies & Co. who recommends holding the shares, said in an interview last week. “It didn’t go his way.”

Idled Production

The Peoria, Illinois-based company plans to idle some production in its home state for a couple of weeks in the current quarter after shutting a Chinese excavator factory for most of July.

Caterpillar’s global retail machine sales growth reported by dealers slowed to 6 percent in the three months through September, because of declines in Latin America and the region that includes Europe, the Middle East and Africa, the company reported in a securities filing today. The growth rate also slowed in the Asia-Pacific region and North America. Retail machine sales grew 13 percent for the three months through August and 14 percent for the three months through July.

Last month, Oberhelman cut Caterpillar’s profit target for 2015 to $12 to $18 a share from an earlier projection of $15 to $20 and said revenue this year may be about $2 billion less than forecast.

China’s growth rate dipped to 7.4 percent in the third quarter, the lowest since 2009. The world economy will expand 3.3 percent this year, the slowest pace since the 2007-09 U.S. recession, and 3.6 percent next year, the International Monetary Fund said Oct. 9. Bank of Israel Governor Stanley Fischer said Oct. 15 that the world is “awfully close” to a recession.

‘Fairly Anemic’

While Caterpillar doesn’t forecast a recession next year, “we see fairly anemic and modest growth through 2015,” and 2013 would “resemble” this year, Oberhelman said on Sept. 24. He declined to provide specific numbers about Caterpillar’s outlook next year. The company is expected to provide its first sales forecast for 2013 when it reports third-quarter earnings on Oct. 22.

Caterpillar is coming out a period of expansion following the recession. Revenue is projected to double to $67.7 billion this year from $32.4 billion in 2009.

The growth was spurred by deals Oberhelman inked since becoming CEO in July 2010, the replacement of aging North American construction equipment, and purchases from global miners trying to meet demand in China and India for metals and coal.

Rising Inventories

The company’s third-quarter profit will rise 30 percent to $2.22 a share from a year earlier while sales increase 6.5 percent to $16.7 billion, according to average analysts’ estimates.

The good times may not last. Weaker expansion rates outside North America and mounting new and used inventories pose a near- term risk for construction and mining machinery manufacturers as demand has deteriorated in Europe and Latin America and inventory restricts growth in China, according to Karen Ubelhart, a Bloomberg Industries machinery analyst.

“Revenue and earnings may fall short of estimates as equipment producers curtail production,” Ubelhart said by e- mail this week. “Mining capital spending should slow substantially in 2013.”

After increases in spending by miners of more than 30 percent this year, initial 2013 guidance indicates a 4 percent decline, Ubelhart estimates.

Delayed Projects

In August, BHP Billiton Ltd. (BHP), the world’s biggest mining company, delayed an estimated $68 billion of projects. Rio Tinto Group (RIO), the world’s second-biggest mining company by market value, said last week it will cut jobs and delay decisions on building projects because of reduced growth in China.

Cummins Inc. (CMI), the U.S. engine maker that projected a dimmer outlook on Oct. 9, may be a “precursor to third-quarter earnings and guidance disappointments,” Ubelhart said.

Caterpillar has slipped to fourth-worst performer on the 30-member Dow Jones Industrial Average (INDU) this year after ranking as second-best in the first two months. The shares, which fell 3.2 percent to $83.86 at the close in New York, have dropped 7.4 percent this year compared with the average 9.2 percent gain for the Dow.

Sales and profit estimates for Caterpillar in 2013 have come down as global economic forecasts were reduced. Company sales next year will be $71.2 billion, according to the average estimate. That’s $2.19 billion less than four weeks ago after nine analysts cut forecasts.

Jim Dugan, a spokesman for Caterpillar, declined to comment on its sales guidance when reached by phone yesterday.

‘All Eyes’

“All eyes will be on the outlook for next year,” Larry De Maria, a New York-based analyst at William Blair & Co. who recommends buying the shares, said in an interview last week. “What’s going to hold them back is softness in mining, which will be down a little, and softness in the global economy.”

In the longer term, Caterpillar’s sales expansion may be stronger. China’s growth has started to stabilize, Premier Wen Jiabao said in remarks published on Oct. 17.

“I’m convinced a year from now, we’ll see recovery in China, which will be helpful for us,” Oberhelman said Sept. 24.

To contact the reporter on this story: Shruti Singh in Chicago at ssingh28@bloomberg.net

To contact the editor responsible for this story: Steven Frank at sfrank9@bloomberg.net

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