Caterpillar (NYSE: CAT), the world’s largest manufacturer of construction equipment, reported its first quarterly earnings loss since 1992 - a drop of $112 million ($0.19 per share) on a 22% sales slump, versus a $922 million ($1.45 per share) profit a year ago.
While the news was hardly unexpected, it clearly tells us that this downturn will continue well into 2010. Heavy equipment sales are a leading indicator for future growth - and there is no better barometer than Caterpillar.
The company’s words and actions illustrate that. Citing a “high degree of uncertainty” about the global economy, CEO Jim Owens stated that, “It’s extremely difficult to know how our customers will respond during the remainder of 2009.”
As a result, Caterpillar slashed its full-year sales forecast to between $31.5 billion and $38.5 billion ($1.25 per share) - down from its $36-44 billion ($2.50 per share) projection just three months ago. Even if sales hit the middle of that range, it would be a 32% plunge from 2008 - the firm’s worst year since the 1930s, according to Reuters.
While CAT stands to gain long term in the global market with expanding new equipment sales, it may take two years or so, beyond the beginning of any economic rebound, before demand resumes for new equipment once again. The outlook is bear for the next 3 to 4 years and Bull thereafter.
Coupled with a huge inventory of idle and used equipment in the field now along with dismal prospects for demand in the near term, once the existing equipment inventory is depleted as growth resumes both domestically and globally, look for CAT to take-off, but if the recovery were to begin today, it would still take another couple of years before CAT reaps the benefits and in the most likely scenario, a rebound for CAT will not occur for the next 3 to 4 years. Beware of any false starts until the global potential is in full bloom again.
Pro-Palestinian groups have called for Caterpillar to create a committee to review whether Caterpillar's products were being used unjustly by the Israeli government in the Gaza Strip and the West Bank. The proposal to create a committee to review Caterpillar's sales was shot down by management, of which only 20% supported the creation of a committee. Stockholder proceedings were interrupted 14 times by protesters who objected to the sale of Caterpillar's equipment to the Israeli Defense Force and invoked the name of a 23-year-old activist killed in the Gaza Strip when IDF solders drove a Caterpillar bulldozer during a home demolition. As a result of the incident, Caterpillar is facing legal action from the victim's family.
CAT’s lack of diversification in the US caused losses, which ate into its stellar overseas performance. Because CAT's performance was mainly linked with the US housing market, the market's slump will have negative repercussions for CAT.
