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Chart of the Day

  • Backlog to build ratio declines consistent with expectations for production cuts
  • Historically, very low backlog to build ratios have coincided with buying opportunities in shares of OEMs
  • Declining production should keep the Class 8 truck fleet old
  • An older fleet with high utilization (mid-90s in May) is typically associated with outperformance for OEM shares

Industrial Indicator: Truck Backlog to Build and More on Mining - class 8 back to build

The Mining Investment Bubble

Yesterday’s Industrial Indicator on Caterpillar’s exposure to mining investment attracted some interest.  The Resources division is CAT’s most profitable and has the highest margins and returns on assets.  CAT even added Bucyrus to this division, apparently with poor cyclical timing.  This is not to say that Bucyrus is a bad fit inside of CAT, just that it was purchased during a period of (very) abnormally high investment in mining equipment.  The first step of our investment process separates cyclically driven results from secular/sustainable results.  The resources division at CAT, along with other mining exposed equipment producers like Sandvik, Komatsu, JOY, and Terex, could see that source of demand evaporate.  Global mining output could continue to expand with much lower levels of capital spending, so a commodity crash is not required for revenues in these divisions to contract.

Industrial Indicator: Truck Backlog to Build and More on Mining - perf 7132012