July 17 (Bloomberg) -- Caterpillar Inc., the largest maker of construction and mining equipment, fell after short seller Jim Chanos said the manufacturer is being hurt by the slowdown in commodities demand.
The shares dropped 1.7 percent to $86.67 at the close in New York. Caterpillar, based in Peoria, Illinois, had gained 6.9 percent this month before today.
The “commodity supercycle is coming to the end,” Chanos, the founder and president at Kynikos Associates Ltd. who rose to fame shorting Enron Corp., said today in a speech at the CNBC Institutional Investor Delivering Alpha Conference in New York. “We are short CAT, which is tied to the wrong products at the wrong time in the cycle.”
The outlook for mining capital expenditures is weakening across all commodities and equipment, with expectations for a 16 percent drop over the next 12 months, Citigroup Inc. said in a July 15 report citing its second-quarter survey. Total mining capital spending based on more than 40 companies worldwide points to a cumulative decline of 30 percent from 2013 through 2015 from the peak last year, Citigroup said.
Jim Dugan, a spokesman for Caterpillar, declined to comment on Chanos’s statements.
Caterpillar on April 22 posted first-quarter earnings that missed analysts’ estimates and cut its 2013 forecast mainly because of a weaker mining outlook. Profit in 2013 will be about $7 a share, compared with a January projection of $7 to $9 and sales will be $57 billion to $61 billion, compared with an earlier forecast of $60 billion to $68 billion, the company said in a statement.
“Profit margins will revert with viciousness in the next 10 years,” Chanos said. He said the company is “being aggressive with their acquisitional accounting.”
Caterpillar’s sales to resources customers have become a bigger share of revenue, accounting for 32 percent of total equipment sales in 2012, after Chairman and Chief Executive Officer Doug Oberhelman bought mining equipment makers Bucyrus International Inc. for $8.6 billion in 2011 and ERA Mining Machinery Ltd. in China last year.
Caterpillar in January said “an internal investigation uncovered deliberate, multiyear, coordinated accounting misconduct” at ERA’s subsidiary Zhengzhou Siwei Mechanical & Electrical Manufacturing Co. that led to a non-cash goodwill impairment charge.
Chanos also said earlier today on CNBC that China, the largest consumer of mined commodities such as copper, is about 20 percent of Kynikos’s portfolio and has been a great place to be short.
The International Monetary Fund said today risks are increasing that China’s economic growth this year will fall short of the lender’s forecast. “Downside risks” to the IMF’s 7.75 percent growth estimate have risen after a gauge of manufacturing weakened in June, the Washington-based fund said in its annual assessment of China’s economy.
“I don’t think the concerns are new at all,” Matt Arnold, a St. Louis-based analyst for Edward Jones & Co., said in an telephone interview today. “Mining has been weighing on Caterpillar’s business for several quarters.” Concern related to sustained weakness in mining is one of the primary reasons he has a hold rating on the shares even with growth expected in construction, Arnold said.
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