Caterpillar’s Stock Drops, and 2 Big Deals in HK ERA and Bucyrus May Be to Blame; Caterpillar: Predictably Unpredictable; The Street’s Difficulty Forecasting Caterpillar Has a Lot to Do With China

OCTOBER 23, 2013, 1:17 PM

Caterpillar’s Stock Drops, and 2 Big Deals May Be to Blame

By MICHAEL J. DE LA MERCED

Two of Caterpillar‘s biggest-ever deals may have played a role in the $3 billion of market value that the company’s stock shed on Wednesday morning. The maker of heavy equipment disclosed that its third-quarter profit tumbled 44 percent from the same time last year, while revenue fell more than 18 percent for the same period. The company said quarterly profit dropped to $946 million, as revenue fell to $13.4 billion. With the company cutting its full-year earnings forecast yet again, investors sold off shares, leading to a 6 percent drop in the stock’s price as of midday Wednesday, to $83.87.The culprit: continued weakness in the mining sector. Caterpillar’s resource industries unit reported a 42 percent fall in sales from the same time last year, while the company’s construction and power units each reported only 7 percent declines. To compound problems, the manufacturer said that it could not forecast when mining customers would start ordering new equipment.

Caterpillar’s problems are in part a bet on mining that it bolstered in a big way through deal-making. In 2011, the company spent about $7.5 billion for Bucyrus International, paying a 32 percent premium in its biggest deal so far. A year later, it bought ERA Mining Machinery of Hong Kong for about $654 million.

Mining equipment sales carried a far bigger margin than Caterpillar’s existing businesses, and the company was wagering that a boom in the excavation of copper and other metals would yield big profits.

But Douglas R. Oberhelman, Caterpillar’s chief executive, conceded that mining production was still strong, but new equipment orders had not followed suit as customers had cut costs.

“What we were watching is mining production all year, while the order rates were coming down and down and down,” he said in an interview on CNBC Wednesday morning.

(It didn’t help that Caterpillar was forced to record a $580 million accounting charge in its fourth quarter last year after uncovering misconduct at a crucial ERA subsidiary, effectively writing off most of that acquisition’s value.)

Mr. Oberhelman added in his CNBC interview that Caterpillar’s bet on mining, including the Bucyrus deal, was for the long term. He insisted that the cycle would turn, as it has in the past. Just when that would happen is unclear: the company is expecting the business to remain weak next year.

“We just need a recovery in mining, which I’m sure will come,” he said.

Caterpillar: Predictably Unpredictable

The Street’s Difficulty Forecasting Caterpillar Has a Lot to Do With China

JUSTIN LAHART

Updated Oct. 23, 2013 6:38 p.m. ET

Caterpillar investors found themselves Wednesday in what is becoming familiar territory: down a hole. The construction and mining-equipment maker said it earned $1.45 a share in the third quarter, down from $2.54 a year earlier and less than the $1.68 expected by analysts. Sales of $13.42 billion were $860 million short of the consensus estimate. It was the fourth quarter in a row in which Caterpillar’s earnings missed estimates, and the fourth in five for sales. Yet in the five years that ended in the third quarter of 2012, Caterpillar’s earnings came in below estimates just three times, with sales missing only five times.

One possible conclusion is that Caterpillar’s results have lately gotten harder to predict. But that isn’t quite right.

Rather, its results got harder to predict a while ago, but nobody noticed when it was regularly trouncing estimates. It is only as Caterpillar’s business has become challenged that forecasting difficulties have stung.

Until 2008, analyst estimates for Caterpillar were tightly clumped together. In the five years before that, the median difference between the highest and lowest quarterly sales estimates when the company reported results was 4%, FactSet data show. In the time since then, it has been 15%.

Initially, that shift reflected the financial crisis stymieing prediction. Since then, though, it likely reflects changes in Caterpillar’s business. Far more of the company’s revenue is tied to China and other emerging markets than used to be, in part because Caterpillar has beefed up its mining-equipment business in recent years.

Assessing trends in those developing and disparate economies is a tricky proposition. Wednesday won’t be the last time Caterpillar gives investors butterflies in their stomach.