Commodities & Metals

What Weak Caterpillar Outlook Means to Global Mining and Metals in 2013

It was just at the end of last week that we gave a pre-earnings update for Caterpillar Inc. (NYSE: CAT) in our DJIA earnings season scorecard, warning that the market was expecting weakness. Caterpillar’s earnings story left a lot to be desired, but this was largely anticipated, if you have paid attention to the stock price. The real story is not what this means for Caterpillar, but what this means for the international metals and mining complex for the rest of 2013 and into 2014.

Caterpillar managed to post a profit of $880 million, or $1.31 per share, for the first quarter. That is down almost 45% from a year ago as sales were down about 17% at $13.2 billion. Note that Caterpillar already had warned of a challenging environment in 2013. Dealers have lowered inventory by $700 million in anticipation of weakness, and Caterpillar’s full-year guidance for 2013 was down to $7.00 in earnings per share on sales of $57 billion to $61 billion. The prior forecast was $7.00 to $9.00 per share on $60 billion to $68 billion in revenue.

Caterpillar has decided to use the share price weakness to its advantage and said that it will repurchase up to $1 billion in its shares during the second quarter. Again, we expected weakness, based on the economic reports being weak and due to how the stock price had been. The good news is that things were not even worse, which is why Caterpillar shares are up 1.2% at $81.40 in early Monday trading.

Deere & Co. (NYSE: DE) has many perceived overlaps with Caterpillar, but its stock was doing better due to agricultural demand. Deere is up 0.2% at $83.60 on Monday, but that is still way above its 52-week low of $69.51. Caterpillar shares are only about $3 above their 52-week low. Joy Global Inc. (NYSE: JOY) is where we see the real ties to caterpillar in mining equipment. Its stock is down 0.4% at $53.98, and it has a 52-week range of $47.69 to $73.10. Our one concern on Joy Global is that it barely one-tenth of the size of Caterpillar.

Our largest concern is in the metals and mining markets. These shares all have been so weak that we think much of the bad news is already starting to get priced in here, as China is slowing again and as Russia and other emerging markets are having sporadic growth issues (or worse). What is driving the concern is that a bottoming out may take much longer than expected now. Investors looking to pile into metals and mining may have a lot more volatility and timing pain than they may have seen in the past as gold mining and other mining operations are being idled or slowed due to demand and price issues.

Take United States Steel Corp. (NYSE: X) as an example, with its drop of 1.3% to $16.17 so far on Monday. With a two-week range of $16.01 to $29.25, the share price is already telegraphing and pricing in weakness ahead. The concern that we face now is that there may be no sudden recovery. If the pricing here remains, then the stock market may be signaling that things will be weak for the rest of 2013. Alcoa Inc. (NYSE: AA) is still down after its earnings, despite a tiny gain so far on Monday. At $8.10, its 52-week range is $7.90 to $10.01.

Even a more solid outfit like Nucor Corp. (NYSE: NUE) is down 0.6% at $42.13, against a 52-week range of $34.23 to $48.60. This steel giant now may have more caution ahead as well, although management has historically been very good at managing to mitigate weakness by adding to strengths during leaner times.

Rio Tinto PLC (NYSE: RIO) is a mining and processing giant when it comes to anything metal coming out of the ground. Some were hoping that bad news was priced in, but Caterpillar is perhaps one drag this morning as Rio Tinto ADRs are down 1.2% at $44.15, against a 52-week range of $41.59 to $60.45. Ditto for Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX), where shares are down 0.45% at $28.10, against a 52-week range of $27.24 to $43.65. Take a look at any gold miner out there and you can see real weakness over the course of 2013.

China’s growth is slowing and it already has empty cities built up that remain empty. Russia’s Vladimir Putin has just spoken his concerned over the slowdown seen in Russia. Growth in India has been disappointing, and now we have seen that cement firms have decided to lower their capital spending plans, based on weak growth prospects. Fears have grown that even Brazil is not immune to weak China growth indications.

Caterpillar shares may be positive after a weak earnings report because it was expected. Unfortunately, its guidance being this low is a signal on the broader global scale for mining and metals that we are more unlikely to see any sudden snap back or quick turnaround later in 2013. If we do not see one in late 2013, then that is likely to lower expectations even for 2014.

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