For Caterpillar The Depression Has Never Been Worse... But It Has A Cunning Plan How To Deal With It

Moments ago Caterpillar reported its latest monthly retail sales statistics and the numbers have never been worse: not only is the dead CAT bounce in US sales finally over, tumbling -8% Y/Y, after a -4% decline in September and hugging the flatline for the past few months, but sales elsewhere around the globe were a complete debacle: Asia/Pacific (mostly China) was down -28%, a dramatic drop from the -17% a month ago, EAME dropping -13%, and Latin America down -36%...

 

... but global retail sales just posted a massive -16% drop in the past month, after dropping 9% a year ago and another 12% in 2013, this was the biggest annual drop since early 2010.  As the chart below shows, CAT has now suffered a record 35 months, or nearly 3 years, of consecutive declining annual retail sales - something unprecedented in company history, and set to surpass the "only" 19 months of decling during the great financial crisis by a factor of two!

 

Worse, with the market no longer rewarding stock buybacks, Caterpillar suddenly finds itself flailing in the gale strength winds of what nobody can claims any longer is not a global industrial depression.

However, there is good news - while Caterpillar's revenues and cash flows may be plummeting with every passing month, at least the company has a cunning plan how to recover some inventory.

According to the WSJ, Caterpillar is eager to reassure shareholders it won't get burned on equipment leased to customers in China even as the economy cools there. CAT Financial Services President Kent Adams said during a conference call on Tuesday that the company keeps tabs on the position of machinery electronically through its Product Link system. 

"If a customer falls behind, we have the ability to derate the engine or turn the engine off, and we've set up a legal presence in all of the provinces of China."

In other words, any and all Chinese lessors who fall behind on their payments will suddenly find their excavator's engine shut down and no longer operable, stuck in the middle of a mine, quarry, or construction site with a paperweight weighing dozens of tons.

So this is great news right? After all, at least Caterpillar will have recourse to its equipment, and can "solidify" its balance sheet. The problem, as we showed last week, is that there already is an epic glut of CAT heavy equipment in the wild.

How epic? Here is a reminder of what CAT products sold recently at an auction:

Was: $2.9m | Now: $15,000: Caterpillar 992C wheel loader

 

Was: $2.7m | Now: $46,000: Caterpillar D11N crawler tractor

 

Was: $900,000 | Now: $47,500: Caterpillar 775D rear dump truck

 

Well, if all else fails, CAT's creditors will at least be able to convert their secured "claims" into all too physical inventory, even if that inventory's market value is now worth less than 99% of book.