During 2013, shares of Caterpillar Inc. (NYSE:CAT) have declined by nearly 8.5%. The company’s poor performance in the stock market is partly stemmed from its decline in profitability and drop in revenue. Moreover, last year’s acquisition of Zhengzhou Siwei Mechanical and Electrical Engineering (‘Siwei’), a producing mining roof support equipment company, for $653 didn’t go well. The deal later resulted in a goodwill write down of $580 million in 2012 due to “deliberate, multi-year, coordinated accounting misconduct” (based on Caterpillar’s account), which didn’t help Caterpillar Inc. (NYSE:CAT)’s reputation. Looking forward, will this company be able to turn itself around and rally?
Will revenues start to pick up?
Caterpillar Inc. (NYSE:CAT) has recently revised its 2013 outlook. The company projects its revenue will range between $56 billion and $57 billion in 2013, which represents a drop in sales of 12% to 15% (year-over-year). The company’s average revenue estimate is nearly 3.4% below its previous estimate. Considering the company’s net sales in the first half of 2013 are roughly 16.6% below last year’s net sales, this means the company’s revenue will have to start to pick up in order to reach its current lower bound of its net revenue projection. Based on the recent developments in China and the U.S (I will elaborate further on these regions below) the company might not meet its current projections, which could further pull back its stock price.
Some heavy machinery companies haven’t done much better. Net revenue at Cummins Inc. (NYSE:CMI) fell by 12% in the first quarter (year-over-year). But this wasn’t the case for Deere & Company (NYSE:DE), as its revenue grew by 9% in the recent quarter (ended April 30).
In the mean time, Caterpillar Inc. (NYSE:CAT) is giving back some of its funds to its stockholders not only via dividend payment, which currently stands on an annual yield of 2.9%, but also via its stock repurchase program.
If we look at the main regions Caterpillar Inc. (NYSE:CAT) operates in, based on dealers’ statistics the sharpest fall is in the Asia/Pacific followed by North America. The only region that seems to keep growing in sales is Latin America. Let’s take a closer look at these three regions.
Caterpillar Inc. (NYSE:CAT)’s main countries in this region include China. Regarding China, the country’s economic slowdown may keep adversely affecting the growth in revenues of the company. Moreover, the company’s bad experiences in this country from the acquisition of Siwei might pull back Caterpillar’s growth in China, as this experience will make the management reconsider purchasing additional companies in China anytime soon.
Deere & Company (NYSE:DE) also expects its revenues won’t grow in its agriculture and turf segment during the year, which could curb down its growth in total net sales.
The ongoing recovery of the U.S housing market is likely to keep pulling up the demand for Caterpillar’s products in the near future. On the other hand, the U.S government continues to cut down its investment in infrastructure projects, which could hurt Caterpillar’s revenue in those segments. If the U.S government will keep cutting down the federal budget in the coming years, this is likely to adversely affect the budget allocated towards public housing and infrastructure projects. Therefore, Caterpillar’s growth in revenue in the U.S could slow down in the coming years, even if the housing market will keep growing.
These potential developments could also adversely affect other companies. Cummins had a 15% drop in revenue in North America in its engine, components and distribution segments. Deere also expects its net revenues in its prime business segment – agriculture and turf equipment – won’t rise in 2013.