Caterpillar Explains Why It Is A Global Recession

Tyler Durden's picture

For those surprised by today's abysmal CAT Q2 results, we can only assume this is because our post from yesterday "Forget Recession: According To Caterpillar There Is A Full-Blown Global Depression" slipped through the cracks.

Here is the punchline we showed yesterday (and over the past several years) explaining why the stock just hit 52 week lows.

 

This is how we summarized it: 'after an increasingly shallower series of dead CAT bounces in the past year, first thanks to Latin America, and then the US, global retail sales just dropped by 14% - marching the biggest Y/Y decline since the financial crisis."

Fast forward to today when we learn that in the second quarter sales dropped by, drumroll, 14% - the worst tumble in two years, driven almost entirely (but nott exclusively) by China and Latin America. Although every other part of the world was pretty bad too.

 

But as always the best insight comes from CAT's commentary of what is going on around the globe. Some excerpts from what is essentially a China bash fest:

  • The economic and industry conditions that were expected at the beginning of the year are occurring.  World economic growth is about as the company expected: severe weakness in mining continues, construction-related sales in China and Brazil are lower and new orders for oil-related applications declined.  
  • "While economic conditions in the United States are modestly positive, the global economy remains relatively stagnant.  Many of the key industries we serve remain weak, and we haven't seen sustained signs of improvement Continuing economic weakness in China and Brazil, as well as uncertainty in the Eurozone and over Greece, haven't helped confidence
  • Prices for commodities like coal, iron ore and oil are not signaling an improvement in the short term. 

Considering the world cup is about 12 months away, CAT may want to start booking some revenue there soon.

But it wasn't just China and Latin America - Europe and the US were crushed too. In fact, here is CAT explaining why it is nothign short of a global recession:

  • In Asia/Pacific, the sales decline was primarily due to lower sales in China and Japan. In China, the lower sales resulted primarily from continued weak residential construction activity. In Japan, the weaker yen contributed to the decline as sales in yen translated into fewer U.S. dollars.
  • Decreases in Latin America were primarily due to continued weak construction activity and the absence of a large government order in Brazil that occurred during the second quarter of 2014.
  • Sales declined in EAME primarily due to the unfavorable impact of currency, as sales in euros translated into fewer U.S. dollars. In addition, the impact of changes in dealer inventories was unfavorable as dealers increased inventories more significantly in second quarter of 2014 than in the second quarter of 2015.
  • Sales declined slightly in North America as weakness in oil and gas-related construction was largely offset by stronger activity in residential and nonresidential building construction.

Or as we showed yesterday:

 

In short: at least when it comes to heave industrial equipment, and a need for mines and/or construction, the world is now in an all out recession if not depression. As expected, CAT's Outlook confirms it:

  • Overall, our view of world economic growth in 2015 is about the same as we expected in the outlook provided with our 2014 year-end financial release in January of 2015.  We now expect world GDP growth in 2015 of about 2.5 percent, about the same as 2014.  We expect growth in developed countries to improve slightly and economies in developing countries to grow at a rate moderately below their growth rate in 2014.
  • There are still significant risks and uncertainties that could temper growth.  Political conflicts and social unrest continue to disrupt economic activity in several regions; in particular, the Commonwealth of Independent States, Africa and the Middle East.  The unresolved economic uncertainty in Greece is also a cause for concern.  The Chinese government's push for structural reforms is slowing growth, and the ongoing uncertainty around the direction and timing of U.S. fiscal and monetary policy actions may temper business confidence.
  • The outlook for sales and revenues has been lowered from about $50 billion to about $49 billion for 2015, down from $55.2 billion in 2014.  The primary reason for the decrease from our initial outlook provided in January is due to the currency translation impact of a stronger U.S. dollar on our sales outside the United States.
  • While the outlook for sales and revenues is down slightly, our expectation for profit has not changed.  We continue to expect that 2015 profit per share will be $4.70, or $5.00 per share excluding restructuring costs.  The expectation for 2015 restructuring costs remains at about $250 million.  Profit per share in 2014 was $5.88, or $6.38 excluding restructuring costs.

Fianlly, since this is CAT, a company which has historically bought back tons of stock during weak quarters yet one which barely repurchased anything in Q2...

... the only way it could hit its unrevised 2015 EPS is with a resumption of massive buybacks. Sure enough, the financial engineering is back:

  • Caterpillar is announcing its intention to repurchase approximately $1.5 billion of Caterpillar common stock during the third quarter of 2015.  The $1.5 billion expected repurchase is in addition to the approximately $500 million of stock that was repurchased in the first half of 2015, and $4.2 billion repurchased in 2014.  However, our stock repurchase plans are always subject to the company's cash deployment priorities and can change based on business and market conditions.
  • "In addition to operational execution around cost, quality and safety, we have a strong balance sheet and generated $1.6 billion of ME&T operating cash flow in the second quarter.  Repurchasing stock is one way we return capital to stockholders, and our healthy balance sheet and strong cash flow are helping us do that despite weakness in the cyclical industries we serve.  In addition to the share repurchase, the Board raised the quarterly dividend 10 percent in June," said Oberhelman.

The good news: CAT still has the balance sheet to avoid what it's income statement now admits is a borderline worldwide depression. The bad news: it still has at most 2-3 more quarters before the reality finally catches up with CAT.

* * *

Finally, why do care so much about CAT? Here is none other than Jim Cramer "explaining" why the CAT conference call is the "only one you will ever need":

"The only conference call you will ever need," according to Jim Cramer, is Caterpillar, it "is my gospel, my go-to call on which many of my decisions are based... I trust Caterpillar's long-term vision... it is a superb evaluator of what's happening in each of the countries it sells in and gives you the most thorough description of each economy." As Cramer concludes, "Caterpillar's the primer, the source for your global outlook..."

So depression it is then.

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ebworthen's picture

Stagnant, fetid, rank, and rotten Ponziconomy.

Go on Janet, raise those rates.

Headbanger's picture

But it's so AWESOMELY STAGNANT!

Since Lehman!

Tom Servo's picture

I don't know what "world cup" is 12 months away... the Men's Soccer one is in 2018.  Maybe the Olympics is 12 months away?

 

divingengineer's picture

Just because nobody wants to buy your shit doesn't mean its a recession.

However, in this case I agree with them.

dontgoforit's picture

Komatsu not doing too well either, at least through 2010 when they stopped showing their numbers.

 

http://www.komatsu.com/CompanyInfo/ir/data/data07_y.html

papaswamp's picture

Way too negative.... Someone should be arrested! Oh wait that's China... Isn't it?

joseJimenez's picture

YEAH,  put them all in those internet camps

Leopold B. Scotch's picture

Don't be the first to stop clapping.

 

Look what just happened to Favre for not sufficiently drooling over Caitlen.

foodstampbarry's picture

Yeah, but we gots obamaphones.

joseJimenez's picture

And don't forget Obamacare!!  If you like you doctor, you can keep it (as a fond memory).

Government needs you to pay taxes's picture

All good in da hood, long as da EBT, HUD, ACA, and malt lickka keep flowing.

Spungo's picture

It must be due to the negative perceptions people have about Caterpiller ever since that Killdozer movie came out. The economy is actually doing great right now. Look at the stock market! All time highs!

joseJimenez's picture

Our current reality...  What sort of fiction should we classify it as?

THE 4th Quadrant's picture

I blame ZeroHedge for this global downturn. All the bears sitting around complaining with all their negative comments btfd, and gold smackdowns, and rigged markets.

smacker's picture

...there ought to be a law against telling the truth.

/s

JLO's picture

dont they use this kind of equipment to extract gold and silver?

 

I guess its back to shovels and panning.

buzzsaw99's picture

only one thing to do. lever up, buy back shares, take bonus.

ghengis86's picture

This world is so fucked, I can't tell if it's tongue in cheek or not. Because yes, that is exactly what to do if you're a c-level exec; hollow this bitch out, reap massive bonuses, ZIRP your way to all time high stock prices, peace out and spend the rest of your life jacking off because the fake wives you keep marrying only want you money, not your dick.

Chupacabra-322's picture

Wasn't it a Global Depression announced by Catepiller yesterday? My how quickly things change.

Catullus's picture

Global Recessionary BINGO!

China sucks

Latin America sucks

Dollar's Up

Oil and Gas Sucks

Europe, Ugh

Marvin the Martian's picture

Maybe the AI running the economy just figured out all of the investors produce nothing but wasted time, and should not be rewarded for moving numbers

eightysixthebs's picture

I'd love to see ZH compare the CAT numbers to their peer group.  While i don't think we're in a global expansion, I do think the low cost guys in the market are taking share from CAT.  

Trucker Glock's picture

Agree with wanting to see a comparison to competitors.  That may be difficult without access to numbers from competitors' individual business units.  I suppose those are available somewhere.  Heavy equipment is only a part of the business for most of Cat's competition.  Volvo, Deere, Hitachi, Case-IH, etc.  And, Komatsu has a large compact equipment segment.  Terex is the closest to Cat that I can think of.  I think Cat dominates in the mining industry.

Edit:  Just saw that Terex has a lot more than heavy contruction/mining equipment in it's portfolio.

Kayman's picture

People buying "low-cost" capital equipment are a tiny part of the heavy equipment market. If you ever owned new junk then you would have a clue. Look up Market Book or Equipment Traders or go to any Ritchies auction and you might get a clue about Cat's market share.

And Cat manufactures all over the world. 

aliki's picture

just listen to oberhelman's interview on CNBC - guy is bitching about a strong USD. i don't remember him crediting a weak USD the last 7 fucking years for his stock prices appreciation. they invested heavily in mining and now they are getting BUSTED UP as a result of commodities getting killed. his earnings have been cut in 1/2 since the financial crisis and once his stock takes out 79 its lights-out. how this guy has a job is an outright mystery to me.

Funn3r's picture

Dead CAT bounce hahaha lol etc.

stant's picture

So bad it's good, I look foreword to catnado on syfi

Handful of Dust's picture

They have tough competition in Asia where workers are paid a fraction of the West and have little or no benefits. Outlook for CAT: Bleak

 

PrayingMantis's picture

 

 

... "Caterpillar is announcing its intention to repurchase approximately $1.5 billion of Caterpillar common stock during the third quarter of 2015."

 

... and with that stock-buy-back, expect the CAT management to get hefty bonuses in the last quarter despite poor and declining sales ... 31-month great wreckovery indeed!

Fuku Ben's picture

(OLD COMMENT EDITED TO INCLUDE HEADERS)

GLOBAL ANALYSIS

In light of the Caterpillar post yesterday and today I decided to dig in and do some global and regional research on a number of interrelated sectors as well as a variety of of companies. And found some very enlightening and symbolic indicators. Their interpretation and meaning are even more complex than the ones I see in some of your corporate logos. One of my first executive level position was with a very large global public company in a key LEI sector. These sectors are at the forefront of indicators of where the global economy will head. So I have an exceptional amount of insight into what is coming our way and how will affect each of you and every aspect of your businesses. I will share some facts that will help confirm this.

After leaving the company and taking a new position I met with my new manager. We discussed the sector and this former company in detail. I listed somewhere between 10 & 15 ways the company was going to struggle or fail going forward. Several months later he asked me to look at a major influential global financial publication article (MGPA) he was reading. He was amazed that the story covered the identical topic we had discussed earlier and that the article covered all the topics I had mentioned. The experts contributing to the MGPA had about 75% of the items we had discussed. The additional items I provided related to applying my knowledge, skill, experience and expertise across a number of areas. My previous employer did not do take many of these actions for change. They have seriously struggled with growth, profitability and share price. They now find themselves experiencing significant contraction.

LEI SECTORS

Congratulations to all of you in these sectors for holding on through the current financial situation. And especially for those of you with 50+ years in all parts of the world. That is quite impressive accomplishment. And IMHO if you have refrained from bringing your company public you may be in the best position on the current financial course. But don't let that fool you. You would have already experienced some of the worst economic downturns and financial struggles. You will find this current economic course different than the past. It would be a shame to see anyone's hard work lost in the upcoming events. As well as the subsequent impacts on your families. Especially when it is not necessary. And each of your sectors will be among the first to be impacted and we are seeing many more indications of this daily.

VISIONS & GOALS

Are you, your colleagues and peers really fed up with the current financial path? A path that seemingly goes back and forth endlessly forever. Please consider a Universal solution for everyone. And look at it not only as a way to help increase the chances of eliminating loss but also as the potential for everyone to gain from it. In the end as it will currently happen you'll be fleeced. Your companies were founded by visionaries. Many of them with just a single all encompassing goal. That is my goal also but it is Universal so it just happens to be much larger and more complex. However, the valuable lessons you've learned can not only be applied but significantly benefit any chances of success. Your influence, contributions and actions towards that goal can help contribute to make that change a reality for everyone.

TEAMWORK

My regards to all of you and your teams on your outstanding accomplishments. Only a successful team will be able to deliver a Universal goal and change to benefit everyone. Are you going to be a part of that team or are you resigned to let the current path continue? My sympathies to you and your families if the upcoming financial events on the current path are allowed to continue to unfold.