Amid the growing concerns of the sluggish pace of global economic recovery, Caterpillar Inc. (CAT) recently revealed its plan of shutting down parts of its Decatur, IL facility that manufactures large trucks, due to the fall in demand. Operations will cease for a week in November and entire month of December.
The company, however, confirmed that the layoffs will be temporary and decided against divulging the number of to-be retrenched employees.
The facility closure follows Caterpillar's trimming its 2015 guidance in the wake of weaker-than-expected growth in the global economy. Factoring in modest, tepid economic growth through 2015 and a less likely scenario of a worldwide recession, Caterpillar expects to generate revenues in the range of $80 to $100 billion in 2015 and earnings per share in the range of $12 to $18 per share. Caterpillar had earlier estimated earnings between $15 and $20 per share.
However, for 2012 the company remains firm on its guided record sales of $68 billion to $70 billion and EPS forecast at $9.60. Caterpillar will discuss its 2013 expectations when it releases its quarterly earnings this month. The year 2013 is expected to be similar to 2012 with respect to worldwide economic growth. However, better growth is expected in 2014.
Caterpillar had been persistently adding production capacity for many of its products. However, with the growing concerns and uncertainty about the pace of world economic growth, short term economic risks in the U.S, the Eurozone debt crisis, and the slowdown in China's growth,
Caterpillar has now opted to be cautious toward acquisitions and investments in expansion. The company remains hopeful that construction activity in the emerging markets will witness modest improvement. The company plans to remain focused on its cost control measures and continue to invest in research and development.
Caterpillar's plans to expand in the mining and China is currently under pressure as mining companies are revisiting and trimming their capital expenditures plans following the slowdown in economic expansion in China, the world's largest user of coal and metals. Prices for coal and iron ore have dropped more than 20% this year due to slowing growth in China and European debt problems.
Among other miners, Vale S.A. (VALE) plans to cut its 2013 mining budget and BHP Billiton Limited (BHP) delayed an estimated $68 billion of projects. Approximately 70% of spending in mines is for large trucks and thus the cutback paints a grim picture for Caterpillar.
We thus maintain our Neutral recommendation on Caterpillar. The recent loss of sales momentum, margin headwinds, negative impact of the European debt crisis and a slowing Chinese economy remain concerns. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
Peoria, Illinois-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base.