Caterpillar cuts outlook, CEO rebuts bear argument

The world's largest maker of mining and construction equipment reported Q2 profit of $960 million, down from $1.70 billion.

By MSN Money Partner Jul 24, 2013 2:14PM

Caterpillar machines are seen on a lot at Milton CAT in North Reading, Massachusetts on January 23, 2013 (© Jessica Rinaldi/Newscom/Reuters)CNBCBy Matthew J. Belvedere


Caterpillar (CAT) reported a lower quarterly profit on Wednesday and cut its outlook for full-year earnings, saying its independent dealers were focused on reducing machine inventories rather than building them up.


"We're actually producing and selling to dealers far less than they're selling to end-users and their customers," Caterpillar Chairman and CEO Doug Oberhelman told CNBC shortly after the company's earnings were released. "That bodes well for the future, but has certainly been a drag on earnings."


The company, the world's largest maker of mining and construction equipment, reported a second-quarter profit of $960 million, or $1.45 a share, down from $1.70 billion, or $2.54, in the period last year. Analysts had expected Caterpillar to report earnings of $1.70 a share.


Its stock price dropped on the news.


Oberhelman said in a "Squawk Box" interview that a slowdown in mining over the last 12 months also hurt profits. "All of our big mining customers are certainly spending less on capital," he said. "We're seeing new exploration cutbacks."


That's exactly what closely followed investor Jim Chanos argued when making his case for shorting Caterpillar stock during the CNBC-Institutional Investor Delivering Alpha Conference last week. Chanos, the founder of Kynikos Associates, said a slowdown in mining is going to cut into Caterpillar's earnings faster and deeper than investors expect.


Reacting to Chanos's thesis, Oberhelman said on CNBC Wednesday, "I'm used to 'Monday Morning Quarterbacking' by lots of angles. What we are trying to do here ... is make [things] within our four walls operationally very solid."


"We know this cycle will end in mining. When we come out, we'll be lean. We're doing a lot of cost-reduction," Oberhelman explained. "We can take advantage of that in this soft spot."


Caterpillar, which also makes locomotives, gas turbines, diesel engines, and generators, said sales fell nearly 16% to $14.62 billion in the quarter -- short of the consensus estimate of $14.93 billion.


On Tuesday, Caterpillar released unaudited dealer data showing a slowdown in sales of its heavy equipment everywhere except North America. "United States [is] good and steady," Oberhelman said Wednesday.


The world's largest maker of construction and mining equipment said global dealer sales of its yellow earth-moving machines were down 8% year-over-year in June. That represented a deterioration from May, when dealers reported that global equipment sales were down 7% from a year earlier. The slowdown in June was led by dealer sales in the Asia Pacific region, which tumbled 21%. In May, those sales were down 14%.


"China has been part of the slowdown in the last couple of years," Oberhelman explained. "But actually in the second quarter, our total sales in China are up 20% across all of our businesses. We think China has bottomed. It's at a very low base. It's coming back slowly."


That relatively optimistic view on China is in sharp contrast to Chanos's position that the Chinese slowdown and the end of "the global commodities supercycle" will drive capital spending back down to something closer to historical levels. Chanos argued last week that spending on mining equipment was currently far higher than the historical average, driven in large part by "the Chinese real estate bubble."


But Oberhelman made his case for a mining comeback on Wednesday: "Seven billion people on the planet going to nine [and] rising living standards around the world require minerals and energy. And that's mining," he said.


"Certainly it's not going to be a straight line up, and we knew that. Supercycle or not -- I don't know what you call them -- it's definitely a cyclical business. We're used to it," he continued. "You have to look out three, five, 10 years, mining will come back."


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