Caterpillar Inc. (CAT) to Close Another Mine

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Caterpillar Inc.’s (CAT – Analyst Report) earnings performance over the past few quarters is nothing to cheer about. Lackluster third quarter results, a trimmed outlook for 2013, declining backlog and the negative impact of the European debt crisis are some of the recent challenges and the company is struggling to find ways out of the maze.

In such a scenario, Caterpillar is looking to curtail costs and get rid of some hindrances. In line with that, the company has planned to close its Pulaski, Va., facility and lay off 240 workers.

Caterpillar shares gained 0.4% following the announcement of the news as the market reacted favourably to the latest in a series of cost cutting measures announced by this construction and mining behemoth to combat the weak demand for its products.

The production of underground mining equipment, which includes scoops, coal haulers and other equipment, will be transferred to a Caterpillar plant in Houston, Pa., by mid 2014. Earlier this month, Caterpillar had announced the closure of its plant in Beckley, W.Va. The Beckley facility specializes in the production of highwall miners used in underground mines.

In October, Caterpillar had announced the closure of its Kilgore, Texas, manufacturing operations by the end of the year. The Kilgore facility makes dippers and ballast boxes used in mining shovels. The company is also closing facilities near Toronto and Sudbury, Canada; Summerville, S.C.; and Owatonna, Minn.

Caterpillar continues to focus on cost-cutting initiatives given the challenging end markets. In 2013 so far, Caterpillar has effectively lowered costs by about $700 million and reduced capital expenditures by approximately $400 million.

Lower mining demand has been a deterring factor for Caterpillar’s earnings so far this year. Earnings slumped 43% year over year to $1.45 per share in the wake of an 18% decline in revenues to $13.4 billion in the third quarter. Even though Caterpillar forecast sales in the fourth quarter to be slightly higher than in the third quarter, it cautioned that earnings per share will be lower due to higher costs resulting from seasonal spending patterns.

For fiscal 2013, Caterpillar now projects sales of $55 billion, down from the previous range of $56 billion to $58 billion. Caterpillar now expects to earn $5.50 per share in 2013, down from the earlier projection of earnings of $6.50 per share due to lower sales volume including an unfavorable mix of products and lower price realization. This is the third quarter in a row in which Caterpillar has trimmed its fiscal 2013 guidance.

We believe the key to remain afloat in turbulent times is to identify and reduce discretionary expenses, trim capital spending, defer new capital development programs, divest underperforming assets and consolidate operations wherever possible. Caterpillar is taking the right measures by resorting to temporary layoffs, shutting down or shifting operations.

Caterpillar currently retains a Zacks Rank #5 (Strong Sell). Stocks in the industrial products sector with a favorable Zacks Rank are Xylem Inc. (XYL – Analyst Report) with a Zacks Rank  #1, and Alamo Group, Inc. (ALG – Snapshot Report) and H&E Equipment Services Inc. (HEES – Snapshot Report), each with a Zacks Rank #2 (Buy).


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