The recently held “Diversified Industrial Conference” brought with it different investing themes across the industrial sector. A whole day was dedicated to machinery players. Some focused on headwinds in Europe, while others cautioned on a strengthening dollar and its impact on their exports. Various point of views were heard from players of the same league. However, there was definitely a common theme found across the sector: a warning on the bleak future of the mining sector. Let’s have a look at how three companies covered this aspect in their presentations.
Caterpillar started off the complaint
It has been more than six months since Caterpillar Inc. (NYSE:CAT) predicted a weak mining market. Those who have been following the mining sector know that mining capex peaked recently and is now destined to fall. Since demand for mining equipment is a direct function of mining capex, sales from mining equipment are expected to fall as a consequence.
Much of the Q&A focused on mining. Dealer inventory reductions have been concentrated in mining, and the company believes that further declines in mining production would lead to sales declines (on a year-over-year basis) in the company’s mining business in 2014. As a result, the company has come out with a cost-cutting program. However, the management believes the single largest risk to its outlook is cost structure and execution of its cost-reduction strategies in the near-term. Sudden, significant shifts in demand would also prove a challenge.
However, the company shouldn’t be considered as a pure-play on the mining sector. Caterpillar Inc. (NYSE:CAT) has a strong construction business. There have certainly been headwinds from the commercial sector, but improvement in residential construction has led to incremental revenue for Caterpillar Inc. (NYSE:CAT). Similarly, the company has a strong and well-diversified power systems business. Sales to the oil & gas, rail and marine industries have been strong.
Joy Global not so joyful
Joy Global Inc. (NYSE:JOY)‘s presentation focused on the company’s outlook in the current environment of declining mining capex. Commodity markets are in supply surplus, which has exerted downward pressure on prices and volume. Moreover, new CEOs at mining companies are being very conservative and have reduced capex budgets for mining equipment by ~40% since 2011.
However, there is a positive point. Most of the reductions in spending took place in 2012 and have already been factored into incoming order rates. Joy Global Inc. (NYSE:JOY)’s prospect list for new projects has also come down by about 40%, but is stable, suggesting that customers will likely maintain the current rate of capex deployment in the near-term. Despite the continuing negative tone of headlines around mining capex, the CEO is confident that there won’t be another step-function down in equipment demand.
In the near-term, management is focused on taking out costs to drive performance even in a weak demand environment, while still maintaining leverage when demand recovers. The “One Joy Global” program has been targeted to streamline its business operations.