Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Why doesn't Caterpillar's head honcho want to stick around? 

Doug Oberhelman on Monday said he'd retire and hand the CEO reins over to Jim Umpleby, the president of Caterpillar's energy and transportation division. The timing is a bit weird, coming about a week before the maker of construction and mining equipment is set to report third-quarter earnings and at least a year shy of Oberhelman's 65th birthday. Things had also just started to look a bit better for Caterpillar's businesses, which have suffered through their longest streak of revenue declines since the 1980s. 

Hmm....
Caterpillar shares dropped on the news its CEO was stepping down
Source: Bloomberg
Intraday times are displayed in ET.

It's not unheard-of for Caterpillar CEOs to leave before they hit retirement age. James Owens, Oberhelman's predecessor, was also 63 when he announced his retirement, though he stayed on as CEO for more than six months after that. But Oberhelman, who has faced heavy criticism over his big, expensive bet on mining equipment at the industry's peak, was believed to have a few more years left in his tenure with which he could try to resuscitate his reputation.

As it is, the ill-fated $8.6 billion acquisition of Bucyrus overshadows Oberhelman's efforts elsewhere, such as the cost cuts that helped keep profits steady even as the commodity-market downturn eroded sales.

Leaving now suggests Oberhelman doesn't see a path for things to turn around significantly in the next year or two. That's not great news for investors who have been betting on a rebound, pushing a Bloomberg Intelligence index of North American construction and mining peers up 39 percent over the past year (compared with a less than 5 percent gain for the broader S&P 500). Caterpillar is trading near its highest valuation relative to projected Ebitda since 2010. 

Rising Tide
Caterpillar's valuation has been bolstered even as the company continues to struggle
Source: Bloomberg

Shareholders weren't blindly optimistic. On its earnings call in July, Caterpillar said it saw no clear signs of a recovery in demand for mining equipment, but the deterioration of that market at least seemed to have slowed. Caterpillar was hopeful the second quarter would represent the worst in terms of that segment's profitability.  

Consolidation among some of Caterpillar's competitors also seemed to confirm the theory that a turnaround was within reach; Komatsu agreed in July to buy Joy Global for $3.6 billion including debt, while Hitachi offered about $530 million for Bradken, a maker of consumable equipment parts.

But a bottoming-out of the mining-equipment market won't necessarily translate into a surge in Caterpillar's sales.

The company sells its products through dealers, so sales don't pick up as quickly as they do for companies catering to end-user demand, Caterpillar's vice president of financial services Michael DeWalt noted in July, explaining why he wasn't as sanguine about stabilization as some of Caterpillar's mining competitors. Sales of aftermarket parts and services will also recover before orders of new equipment. 

There's also a risk that whatever recovery the company sees in its mining-equipment business isn't enough to overcome weakness in other parts of the business. Industrial-equipment maker Dover recently found itself in a similar situation. Its beleaguered business that sells equipment for upstream drillers is actually improving, but profitability headaches in its refrigeration division and a continued sales downturn elsewhere in its oil-and-gas-related operations forced the company to cut its guidance -- for the eighth time since December 2014.

Digging a Deep Hole
Caterpillar's revenue has been mired in a multi-year slump that likely won't abate next year
Source: Bloomberg

Analysts were already expecting Caterpillar's revenue to fall an additional 1.6 percent in 2017 after a nearly 15 percent drop this year. That would give the company its lowest revenue total since 2009 -- the year Oberhelman became CEO-elect. His decision to step down raises the question of whether the company's actual outlook could be even worse. 

But steering the company toward a rebound will now be someone else's problem.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Umpleby will take over the top post on January 1. Oberhelman will stay on as board chairman until March 31 and then hand that role over to Dave Calhoun of Blackstone.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net