Caterpillar (CAT) Stock Price Drivers

Stock Price Drivers Construction Industries Sales of construction machinery are linked to investment and spending on construction and infrastructure development projects that are either publicly or privately funded. Caterpillar's per share earnings are positively correlated to construction spending in the US by a factor of 0.57. US construction spending has increased 10.6%. from the beginning of 2012. Residential construction though far from its 2007 peaks is up 28% while non-residential construction is up 2.8% since 2012. Simultaneously, the Architectural Billings Index has sustained above 50 since the second half of 2013, which indicates that construction activity in the US is increasing. US Construction Spending vs. CAT EPS 800% 250% 200% 600% 150% 400% 100% 200% 50% 0% 0% -50% -200% -100% 2004 2005 2006 2007 2008 2009 2010 2011 2012 -Total Construction Spending -Basic EPS, GAAP Resource Industries A recent fall in revenues from the Resource Industries segment is the leading cause behind Caterpillar's slowed growth. Mining machinery sales are dependent on global mining output: as mining companies increased capacity over the five years ending FY12 following higher demand from emerging markets, especially China, CAT's revenues from the Resources Industries segment rose 276% over the period. Commodity prices have since tumbled from their 2008 highs. The Dow Jones-UBS Commodity Index (DJ-UBSCI), which tracks commodity futures traded on US exchange markets, fell by over 50% in just six months ending February 2009. Dow Jones-UBS Commodity Index $255 $235 $215 $195 $175 $155 $135 $115 $95 $75 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Though global coal production is higher in 2007 peak, it is growing at a slower pace. Caterpillar's EPS varies with changes in coal production by a positive correlation factor of 0.73. CAT's resource segment recorded a 261% surge in revenues from 2009 to 2012 as coal production ramped up worldwide with the company booking record sales in 2012 as miners built capacity. However, the coal market is now experiencing a slowdown following a drop in demand from the US and China, with miners struggling to utilize excess capacity and slashing capital expenditures. CAT EPS vs. Coal Production EPS Coal Production (mtoe) 250% 200% 7% 150% 6% 100% 5% 50% 3% 0% -50% 1% -100% 2004 2005 2006 2007 2008 2009 2010 2011 2012 0% Correspondingly, the mining industry's average capex has dropped 10% so far this year, and is estimated to fall another 15% in FY14. % Change in Capex (Top 4 Producers) BHP Billiton Glencore Xstrata Plc 3.10% Vale SA 4.80% 8.10% Rio Tinto 25.40% Inventory Management How Caterpillar manages its current inventory levels will have a bearing on its stock price over the current quarter and in FY14. The company has said that it expects dealers to destock another $1bn worth of inventory, and has hence lowered its earnings forecast for the 2013 fiscal year. However, if destocking continues into 2014, the stock's valuation is expected to continue falling. CAT Dealer Stats(% Change in Sales) 80% 400% 60% 300% 40% 200% 20% 100% 0% 0% -20% -100% -40% -200% -60% -300% -80% -400% -100% Sep-08Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 -500% I North America IAsia/Pacific IEAME ILatin America Growth in the company's order backlog has also hit roadblocks. Caterpillar has recorded a steady decline in new orders against receipts from orders delivered since 1QFY11. Book/Bill & Backlog/Build Ratio 1.6 Book/Bill Ratio -Backlog/Build Ratio 1.4 1.2 0.8 0.6 0.4 0.2 4QFY10 1QFY11 20FY11 3QFY11 4QFY11 1QFY12 20FY12 QFY124 QFY121 QFY132 OFY13 Machine Orders Following a buildup of inventory over 2011 and 2012, dealers and distributors have reported falling sales for heavy machinery, with the Asia/Pacific region recording the steepest declines. Machinery dealers are now placing fewer orders, which is a major cause behind the deterioration in Caterpillar's performance. Retail sales, as reported by dealers and distributors, were down 9% in 3QFY13, after falling 8% in the preceeding quarter as well. CAT Dealer Stats-Machine Sales(3M Rolling YoY%) 35 30 25 20 15 10 5 -5 -10 -15 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 SOURCES: Company Data, SEC filings, Bloomberg Professional Services BIDNESS etc. DISCLAIMER: Bidness Etc(TM) and related marks are owned by Bidness Etc. Any other trademarks appearing on this website are the property of their respective owners, and are not used to indicate the origin of goods or services offered or provided by Bidness Etc herein or to suggest approval for or affiliation with Bidness Etc Basic EPS