Caterpillar Explains Why It Is A Global Recession

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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