Caterpillar Cuts Forecast as Mining Equipment Demand Drops

Caterpillar Inc. cut its earnings forecast and posted profit that trailed analysts’ estimates for a third straight quarter as mining-equipment sales declined on slower commodity demand from emerging markets.

Earnings in 2013 will be about $6.50 a share on sales of $56 billion to $58 billion, the Peoria, Illinois-based company said today in a statement. That’s lower than analysts’ estimates and down from the company’s April projection of about $7 a share on revenue of $57 billion to $61 billion.

Second-quarter net income fell to $1.45 a share, missing the $1.68 average of 19 estimates compiled by Bloomberg.

Caterpillar, the largest manufacturer of mining and construction machinery, saw sales fall the fastest in the Asia-Pacific region during the quarter as mining companies cut spending in Australia, the No. 1 exporter of iron ore and the second-biggest shipper of coal. With economic growth slowing in China, some of Caterpillar’s commodity-producing customers such as BHP Billiton Ltd. and Rio Tinto Group are cutting billions of dollars from their budgets.

“A lot of mining majors live in Australia and produce a lot of material,” Matt Arnold, a St. Louis-based analyst for Edward Jones who has a hold rating on Caterpillar, said in an interview today. “Emerging-market demand slowing weighs on exports and they are dialing back on spending.”

Currency Moves

Caterpillar dropped 2.4 percent to $83.44 at close in New York. The shares have declined 6.9 percent this year.

Second-quarter net income dropped to $960 million from $1.7 billion, or $2.54 a share, a year earlier. Caterpillar said “unfavorable” foreign currency moves reduced profit by $120 million, offset by a $135 million gain from a settlement with the previous owners of Zhengzhou Siwei Mechanical & Electrical Manufacturing Co. in China.

Sales fell 16 percent to $14.6 billion, less than the $14.9 billion average of 16 estimates. Analysts saw 2013 profit of $6.81 a share on sales of $58.6 billion.

Under Chairman and Chief Executive Officer Doug Oberhelman, Caterpillar expanded in mining through acquisitions over the past two years, making its resource-industries unit the company’s largest segment by revenue last year. The company got 37 percent of its sales from North America in 2012, 26 percent from Asia-Pacific and 14 percent from Latin America.

Power systems, which includes engines, turbines and locomotives, is the biggest segment by sales and profit this year.

‘Wrong Products’

A commodities supercycle, or longer-than-average period of rising prices, is coming to an end and Caterpillar “is tied to the wrong products at the wrong time in the cycle,” Jim Chanos said July 17. Chanos, the founder and president of Kynikos Associates Ltd. who predicted the collapse of Enron Corp. in 2001, said he’s shorting Caterpillar.

Caterpillar today lowered its outlook for global growth in 2013 to a little over 2 percent, a slower rate than last year.

The company’s machinery retail sales reported by dealers fell 8 percent globally in the quarter, according to a filing yesterday. The Asia-Pacific region posted a 21 percent decline.

While sales decreased in all segments, the most significant drop was in resource industries, with revenue down 34 percent due to dealer inventory reductions and weaker demand in mining.

Inventory Decline

Sales and profit in the second quarter were hurt by dealers reducing inventory by $1 billion, more than Caterpillar previously expected, Oberhelman said in the statement. Dealer machine inventory is expected to decline about $1.5 billion to $2 billion in the second half and end the year about $3.5 billion lower than year-end 2012, he said.

“That means that we are underselling end-user demand this year, and it sets us up for better sales in 2014,” Oberhelman said.

Caterpillar will take additional steps to cut costs in the second half of 2013, following the production cuts and temporary lay offs that were implemented in the past few quarters, Corporate Controller Mike DeWalt said on a call with analysts today.

The company repurchased $1 billion of stock in the second quarter and said today it expects to buy back an additional $1 billion of shares in the third quarter.

Caterpillar bet on mining with its acquisition of Bucyrus International Inc. for $8.8 billion in 2011 and ERA Mining Machinery Ltd. in China for about HK$5 billion ($640 million) last year.

Caterpillar took a $580 million goodwill writedown in the fourth quarter after discovering what it called accounting “misconduct” at Siwei, which is part of ERA.

Mining capital spending will drop 11 percent this year and 14 percent next year, based on estimates from the 40 largest global mining companies, Stephen Volkmann, a New York-based analyst for Jefferies & Co., said in an interview last week.

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