Remain Cautious About Caterpillar

This article was originally published by TheStreet and also appeared on Yahoo! Finance

By Sarfaraz A. Khan, Research Assistant: Gohar Yousuf,
February 25, 2014

NEW YORK (TheStreet) -- About two weeks ago, after missing revenue and earnings estimates for four consecutive quarters, the world's largest mining and construction equipment companyCaterpillar (CAT_) surprised Wall Street by delivering better than expected quarterly results. Caterpillar reported strong demand for construction equipment, helped by aggressive cost-cutting measures. Moreover, the business also gave an optimistic forecast for 2014. Amid all this positivity, Caterpillar shares have risen by 11% since the earnings release, including yesterday's rally, and are currently hovering around $96.

However, I believe investors should think twice before buying into this optimism. Caterpillar's core operating area, resource industries, will likely struggle through 2014. This will be an extremely challenging year for Caterpillar, as it is targeting flat revenues in the current year, as compared to last year. This means that its other segments will have to show consistent improvements to offset the declines coming from mining equipment.

Caterpillar’s Disappointing Performance: It All Comes Down to Power Systems

By Sarfaraz A. Khan and Gohar Yousuf

The weakness in commodity prices, particularly coal and iron ore, which caused the slowdown of the mining industry, has hit the growth of mining equipment firms. The mining equipment is a $1 trillion market that employs hundreds of thousands of people around the world. But due to the slowdown, the mining companies have laid off thousands of workers and temporarily closed their facilities. The leading mining and construction equipment maker Caterpillar (CAT) alone has cut more than 13,000 jobs. Overall, the sector’s annual capital expenditure for 2013 is expected to fall by 24% to $76 billion. 

Meanwhile, increasing competition from Chinese manufacturers, who mainly compete on price, has made things worse. Nearly 50% of the global demand for construction equipment comes from China, where Caterpillar is engaged in a battle for market share against the local rivals. Earlier in October, Caterpillar released its quarterly results that disappointed investors.

Moreover, for the third time this year, the business has reduced its annual guidance. It’s no wonder that the company’s stock is the 15^th most shorted stock according Goldman Sachs' Hedge Fund Monitor which analyzes the positions of 783 funds.... read full article at GuruFocus