3 Takeaways From Caterpillar Inc's Sales Report You Have to Know

In just a month's time, Caterpillar stock has dashed investors' hopes of ending 2014 on a good note. From returning nearly 15% since the beginning of the year until last month, the stock is now struggling to hold up, having shed as much as 13% over the past month. Blame two consecutive dismal sales reports for the bloodbath.

Every month, Caterpillar releases supplementary information about its retail machinery sales for the preceding three months on a rolling basis. If the company's report for July left investors disappointed, its latest report for the three months ended August has triggered a mini-panic in the market.

Why is Caterpillar struggling with low equipment sales despite a robust U.S. construction market? Is the mining industry slipping into a deeper mess? Can a strong energy and transportation business help Caterpillar sail through? Let's find out. 

The weak link

Caterpillar's global machine sales for the three months through August slipped 10% year over year, with North America turning out to be the only market that reported higher sales. Take a look:

Geographic Region

Direction of Sales

% Change in Sales

North America






Latin America









 Source: Caterpillar

A strong North American market is great news for Caterpillar, considering that it counts as the company's largest market, having accounted for roughly 38%of its total machinery sales last year. Unfortunately, even as North America grows, some of Caterpillar's key international markets are slowing down at a rapid pace.

Consider Latin America, for instance. Sales from Caterpillar's construction industries division slipped 1% in the three months through August despite 12% growth in North America, thanks to 23% lower sales from Latin America. Likewise, Caterpillar's mining-equipment sales from Latin America dropped a staggering 52% versus 3% decline in sales from North America. To give you the bigger picture, here's a useful graph from Bloomberg that shows Caterpillar's three -months rolling dealer sales statistics for each of the past seven months.


Source: Bloomberg 

Notice how growth at Latin America has decelerated over the months. Until the quarter ended April, Caterpillar reported 17% higher construction-equipment sales from the market. By August, that swung to 23% lower sales. The Asia-Pacific region has been no better, registering double-digit fall in sales since the quarter ended June. The two markets combined generated more construction-equipment sales for Caterpillar than North America last year - as evidenced below -- which is why the company is having such a hard time now. 

Source: Caterpillar Annual Report 2013

The story gets worse as you move on to Caterpillar's resource industries, or mining-equipment division. With sales consistently declining more than 40% in every key market outside the U.S., as shown in the Bloomberg table above, it's disaster written all over.

As long as global mining markets remain sluggish, Caterpillar's profits will be under pressure. That's because resource industries may have a smaller share in Caterpillar's top line as compared to its construction-equipment division, but it has proven to be the more profitable of the two businesses over the years. For perspective, resource industries contributed a quarter to Caterpillar's total machinery operating profits last year versus construction industries' 21% contribution.

What's worrisome is that Caterpillar's mining-equipment sales from North America fell 3% during the three months through August, marking the first such drop since the April quarter. Now if North America also hits a roadblock, you know for sure what Caterpillar has in store. If recent production-increase announcements from mining majors like BHP Billiton have puzzled you, understand that most of the mining companies are trying to improve production at existing mines and holding back new expansions altogether. That kind of production boost may not require new machines, and hence doesn't really help a mining-equipment manufacturer like Caterpillar.

This looks good, but...

On a brighter note, the market appears to have overlooked the silver lining in Caterpillar's latest sales statistics. Today, Caterpillar is a lot more about energy and transportation than mining, and that's where the company pulled off interesting numbers for the quarter ended August. 

Source: Bloomberg

E&T sales at Caterpillar dealers improved 4% year-over-year during the three months through August, with transportation and oil & gas industries each reporting double-digit growth in sales. This is big news, because while E&T encompasses several sectors, transportation and oil and gas are the two main contributors to revenue, as shown below.

Source: Caterpillar presentation at ISI March 2014 Industrial Conference.

But while some analysts believe the rush to buy locomotives ahead of the implementation of Tier 4 emission standards in January next year could be one of the factors driving Caterpillar's transportation sales higher, I'm not too sure.

Though January is around the corner, Caterpillar's compliant freight locomotives are unlikely to hit the market before another couple of years. In contrast, rival General Electric is all set to roll out its locomotives next year, just in time to grab the opportunity. Caterpillar is already feeling the heat -- During its last earnings call, management mentioned how the company could have sold more locomotives this year had it built more. Meanwhile, General Electric bagged its first order for 39 Tier 4 locomotives last quarter.

Simply put, it remains to be seen whether Caterpillar's transportation sales can continue to trend higher. Likewise, the sharp jump in its sales from the oil and gas market is also surprising. Investors should perhaps wait for a couple more quarters to see whether this trend is here to stay. If it does, investors have a good reason to be excited since E&T is Caterpillar's biggest revenue and operating profit churner.

So is Caterpillar stock headed lower?

One thing's clear: Geographic diversity means that an uptick in the U.S. construction market isn't enough to steer Caterpillar forward. More importantly, the company may be known for its construction equipment, but it's a lot less reliant on the construction markets today than it was some years ago. Caterpillar's latest sales statistics unfortunately fail to dispel investors' fears, and if things don't improve soon, the sell-off in the stock could only get worse.

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The article 3 Takeaways From Caterpillar Inc's Sales Report You Have to Know originally appeared on Fool.com.

Neha Chamaria has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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