CAT Misses Across The Board, Slashes Sales And Profit Outlook
Caterpillar just can't catch a break. First, in January the firm was punk'd by a Chinese acquisition fraud, forcing the company to write off half of its Q4 earnings. This, of course, in the aftermath of the miss in both Q3 and Q4 earnings. And now we get the latest disappointing news from the firm as Q1 numbers are reported lower across the board.
- Q1 EPS $1.31, Exp $1.38; this includes a tax benefit of $87 million
- Q1 revenue: $13.2 billion, Exp. $13.8 billion
- Guides much lower, with revenue now seen at $57-61 billion, compared to $60-68 billion previously
- CAT forecasts profit per share of $7.00, compared to $7.00-9.00 previously.
- Operating cash flow of $900MM, but all of it generated from net working capital, i.e., inventory liquidation
- And when you can't spend on capex, you spend on buybacks: CAT to extend buyback through 2015
So much for that.
Some more details on the firm's cash flow management: all from net working capital:
"In our year-end 2012 financial release, we said the first quarter of 2013 would be challenging, and it certainly was. As expected, inventory changes were a major factor. Caterpillar and our dealers usually add inventory in the first quarter to prepare for higher end-user demand in the spring and summer. In the first quarter of 2012, we added about $2 billion to inventory, but this year, we cut inventory by about a half billion dollars. In the first quarter of 2012, Cat dealers added machine inventory of about $875 million, and this year, they reduced machine inventory by about $700 million. Those are significant year-to-year swings, and coupled with moderating end-user demand, resulted in sales and revenues being down 17 percent," said Caterpillar Chairman and Chief Executive Officer Doug Oberhelman.
The summary outlook:
We have revised our outlook for 2013 to reflect sales and revenues in a range of $57 to $61 billion, with profit per share of about $7.00 at the middle of the sales and revenues outlook range. The previous outlook for 2013 sales and revenues was a range of $60 to $68 billion and profit per share of $7.00 to $9.00.
"What's happening in our business and in the economy overall is a mixed picture. Conditions in the world economy seem relatively stable, and we continue to expect slow growth in 2013," said Oberhelman.
"As we began 2013, we were concerned about economic growth in the United States and China and are pleased with the relative stability we have seen so far this year. In the United States, we are encouraged by progress so far and are becoming more optimistic on the housing sector in particular. In China, first quarter economic growth was slightly less than many expected, but in our view, remains consistent with slow growth in the world economy. In fact, our sales in China were higher in the first quarter of 2013 than they were in the first quarter of 2012, and machine inventories in China have declined substantially from a year ago," said Oberhelman.
"From an operational standpoint, we have taken action to align production, costs and capital expenditures with the sales and revenues outlook. While 2013 will be a challenging year, we are confident about the long-term prospects for our business, and when conditions improve, the steps we have taken will position us well to serve our customers and deliver better financial results," added Oberhelman.
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The primary reason for the decline in the outlook is lower mining-related sales in our Resource Industries segment. Over the past quarter, orders for mining equipment have been depressed and far below the first quarter of 2012. As a result, our expectations for mining-related sales in 2013 have been reduced substantially, and our revised outlook reflects a sales decline of about 50 percent from 2012 for traditional Cat machines used in mining and a decline of about 15 percent for sales of machines from our Bucyrus acquisition.
And the full outlook:
2013 Economic Outlook
- Our expectation for world economic growth is about the same as the outlook included with our year-end 2012 financial results. We anticipate overall world economic growth of about 2.5 percent—a small improvement from 2.3 percent in 2012.
- Purchasing manager indicators improved in the first quarter, and industrial production increased in the majority of countries. Both indicate that world economic growth is benefiting from monetary easing that started 19 months ago.
- Central banks continued easing in the first quarter, and we expect the world economy will continue to improve in 2013.
Key points related to this outlook include:
- The modest recovery in the world economy since the financial crisis has failed to address high unemployment. The number of unemployed in the world is up about 17 percent since 2007, and central banks are gradually switching their policy focus from inflation to growth and unemployment. We believe this trend will continue throughout 2013.
Most central banks reduced interest rates over the past 19 months, and average short-term interest rates in the world are near lows reached during the financial crisis. We expect further rate cuts in coming months.
- With interest rates at or near record lows in many countries, some central banks injected more funds (quantitative easing) into financial systems to promote lending and economic growth. With both Japan and the United States following aggressive quantitative easing policies, we expect other countries will eventually implement similar policies.
Unprecedented central bank easing has raised concerns about potential inflation problems. Central banks that raised interest rates to address inflation concerns have returned to lower rates as most economies have not shown an ability to support higher interest rates or reduced liquidity.
- Inflation has shown few signs of becoming a problem, particularly in developed economies. After nearly five years of near record low interest rates, average inflation in the world is near a 40-year low. We believe that high unemployment and modest economic growth will keep inflation under control at least through this year.
- Demand for most metals and thermal coal increased last year, despite 2012 being the weakest year for economic growth in the current recovery and with industrial production in over half the world's economies below 2008 peaks.
- Economic growth in 2013 should improve demand for most commodities, and we expect most prices will average slightly higher in 2013 than in 2012. We expect copper prices to average more than $3.25 per pound in 2013 and iron ore about $135 per ton. Iron ore is benefiting from an increase in steel production in China.
- U.S. natural gas prices averaged over 40 percent higher in the first quarter than a year earlier, reducing its attractiveness in generating electricity. As a result, we expect Central Appalachian coal prices should increase from $63 per ton in 2012 to $65 in 2013. We expect average Australian thermal coal prices in 2013 to be close to last year's $96 per metric ton. World coal production will likely increase slightly, with growth occurring in Asia.
- Last year, Australian mining companies increased capital expenditures more than 50 percent while their profits declined 33 percent. This imbalance, which we believe occurred in other countries as well, has prompted mining companies to reduce capital spending. We expect this adjustment will continue throughout 2013.
- Developed economies recovered slowly from the financial crisis. Combined economic output in these countries is about even with the 2008 peak, representing nearly five years with no economic growth. Industrial production in the majority of these countries is below pre-recession peaks, and unemployment is up more than 40 percent.
- As a result, we expect interest rates in developed countries will remain at record lows throughout 2013, and that central banks will inject more liquidity into financial systems. Growth in developed countries should gradually accelerate throughout the year, improving to about 1.5 percent for the full year.
- We anticipate the U.S. Federal Reserve Board will maintain short-term interest rates near zero for the fifth consecutive year and expand its balance sheet at least another 30 percent. Consumer inflation averaged only 1.4 percent annually from 2008 to 2012 and is unlikely to develop into a problem this year. Overall, our expectations for U.S. economic growth are about the same as our previous outlook. We continue to expect growth of at least 2.5 percent in 2013.
- Housing starts in the United States averaged a 969 thousand-unit-annual rate in the first quarter of this year, the highest rate since 2008. We expect further improvement, with 2013 starts of about 1.1 million units. Housing affordability is near a record high, home prices are recovering, and the number of unsold new homes is near a 50-year low.
- Nonresidential construction in the United States improved in 2012, and we expect further increases this year. Positives include lower vacancy rates, higher property prices and some improvement in state and local government spending.
- Coal production in the United States declined 8 percent in the first quarter of 2013, but prices were within 5 percent of last year. Electric utilities generated more electricity and appeared to be allocating a higher fuel share to coal. We expect that some improvement in utilities coal burn and continued high coal exports should result in coal production down about 1 percent for the full-year 2013.
- We believe that economic policies in the Eurozone have not changed enough to address record high unemployment, a 20-year low in construction and over a year of declining output. We expect the Eurozone economy will decline close to 0.5 percent this year.
- We expect the rest of Europe will have modest growth, allowing marginal growth for all of Europe in 2013. Construction, however, is likely to decline.
- The Bank of Japan announced a target of a 45-percent increase in the monetary base by the end of this year, up from 20-percent growth in March. This aggressive program appears to be improving confidence. We expect about 1-percent growth in the Japanese economy. Construction orders, which are already increasing, should be up compared with last year.
- Developing countries cut interest rates in early 2013, and we expect further cuts this year will bring average rates close to lows reached during the financial crisis. We expect lower interest rates will improve economic growth to over 5 percent in 2013.
- Total credit advanced by the financial sector in China increased by a record amount in the first quarter, purchasing manager surveys improved, and infrastructure investment was up about 20 percent. Inflation has remained below target, which will likely allow the government to continue pro-growth policies throughout this year.
- As a result, we expect the Chinese economy will grow more than 8 percent this year, up from 7.8 percent last year. Construction activity is increasing, and we expect it will be up for the year. Imports of most key commodities increased in the early months of the year, and further growth is expected.
- Most other Asian countries also eased economic policies, and combined economic growth is expected to improve this year. Better growth should benefit construction.
- Inflation in most Latin American countries is within their central banks' target ranges, which should allow central banks to keep interest rates low. We expect regional economic growth will improve to over 3.5 percent in 2013, benefiting from a recovery in Brazil and slightly higher commodity prices. Growth in construction has outpaced that in the overall Latin American economy in each year of the current recovery, a trend that we expect will continue in 2013.
- We expect economic growth in both Africa/Middle East and CIS will be over 3.5 percent in 2013, close to growth rates achieved in 2012. Most countries maintained policy stances close to those adopted in the financial crisis, and we do not expect any major policy changes during the rest of this year.
- We believe that most countries tightened economic policies too early in the recovery from the financial crisis. As a result, world economic growth slowed in 2011 and again in 2012, resulting in the worst recovery in decades. Most countries have since reversed some of this tightening, but economies have been slower to respond than in 2009. Our concern is that central banks will again tighten policies prematurely as better economic growth emerges, particularly as some face criticism about the measures taken to deal with the slow economic growth.
- Eurozone leaders have shown almost no inclination to adopt more pro-growth economic policies. Without policy changes, we believe the current downturn, already five quarters long, may last throughout 2013.
So much for the dead CAT bounce for the fourth year in a row.
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