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.
- 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.