Caterpillar Inc. Can Turn Itself Around But They Have To Make One Difficult Decision

 

Caterpillar Inc. has to take a difficult decision to spin off its mining construction divison after three years of falling profits and revenues

Caterpillar Inc. (CAT) is known for being a strong and resilient company in the face of tough economic environment for the past decades, but the past three years have been unquestionably difficult and painful. The company withstood a crisis of a magnitude that stretched its resilience to its limits.

The primary concern was the company’s financial history. For the last 52 weeks, the building construction of CAT stock price has nosedived to 28%, wiping out almost $19 billion of its value. The past three years has seen its overall revenue fall from approximately $66 billion to around $55 billion, though its North American sales has slightly rebounded from $22 billion to $24 billion, courtesy to a growing US economy.

The other markets from Latin America to Asia, has seen slowdowns as their economies suffered from being dependent on natural resources (as is the case with Venezuela) to structural problems (with China slowing down as it focuses on reforming its economic structure). In fact, revenues from abroad have dropped from approximately $17 billion to barely over $11 billion, a 36% drop.

Its performance on the profitability perspective seems worse. For the past three years, profitability has also collided; falling from $5.7 billion to around $3.6 billion, a massive 35% drop, including the North American market as well.

The reasons are not hard to evaluate. Global mining investments around the world are being scrapped by many mining giants, such as Rio Tinto, BHP Billiton, along with oil and gas companies searching for both conventional and unconventional oil from the tar sands in Canada to the deep-sea saltpan ocean in Brazil and Australia. All these resource sectors have been facing the fall out of low commodity prices, especially oil that has seen a rout of more than 50%.

The question then arises, how long can Caterpillar survive this period of trough? If it has survived the periods of the low oil prices through economic recessions or other factors, then we can be reasonably confident that it can go through this period as well. Its years since the recession ended with growing global economies, though on an uneven scale.

The company is facing a crisis in the form of a shale boom revolution that witnesses no sign of slowing down. It will be naïve to expect global commodity prices to return to higher levels, especially when there is a change in global economic order, as global economies transition from exports and business investments to consumption from the consumer side.

Advance countries and economies that are rich in resources, such as Canada, will not be fuel by mining investments, at least in the short run. Long-term investments with countries focusing on sustainable economies and focus on the quality of economic growth might favor itself and divest their mining resource division, as a result of the changing dynamics in the operations of global economies around the world.