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.
