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Takeaway: This is our first read - more after the call

Summary


The most surprising part of the CAT release this morning is the lack of specifics on a restructuring program.  Another unusual item is that CAT continues to focus exclusively on mining equipment, despite declines in Power Systems and Construction Industries.  While, CAT has finally reduced guidance to a reasonable number for this year, we do not think that the 2014 top line will matter as much as the 2014 margin.  Mix is shifting away from high margin resources-related capital equipment, while price has turned unfavorable at Resource Industries.  That suggests a 2014 EPS decline vs. 2013’s.  This release is consistent with our long-term view of the down-cycle in resources related capital spending.

Quick Highlights

  • 2014 Mix Problem:  Growth in Construction Industries, flat Power Systems and declines in Resource Industries (amid pricing pressure) does not bode well for CAT's margin next year.  Flat revenue plus a margin decline results in a 2014 EPS decline from 2013.  That is consistent with our expectations.
  • No Restructuring:  CAT has paired recent disappointments with buyback announcements, giving longs a lollipop for their time in the dentist chair.  We had expected a detailed restructuring program to serve a similar purpose today, but the cost reductions discussed are a continuation of earlier efforts, by our read.  Maybe we will hear more on the call, but this is likely to be a key source of pressure on the shares.
  • Power Systems Down:  CAT management had directed investor focus to Power Systems, but Power Systems is not performing so well, with sales down 7% and operating profit down 6%.  2014 guidance suggests it will only be flat.
  • 2013 Meets Us:  We have had a sub $6.00 expectation for 2013 throughout the year (e.g. Feeling Managed?) and margin expectations for 2H in the previous guidance appeared unrealistic.  CAT can probably do $5.50 this year, so the focus now turns firmly to 2014 earnings, which appears from initial guidance likely to decline vs. 2013.  More after the call.