Mining Industry Giants Are Tactfully Cautious

Shaunak is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One can predict a downturn in the economy but he can’t predict its outcome. We can simply take an initiative, be proactive and measure up this economic storm and react accordingly knowing that risks can go either way.

So what has Caterpillar (NYSE: CAT) pointed at with their revision in long-term forecasts? If it indeed is a downturn, what is CAT's strategy to beat or rather survive it? Let’s take a look at the recent developments and figure it out for ourselves.

The industry heavyweights CAT revised their 2015 revenue forecasts to $80 billion -$100 billion which affected their share price forecast to $12-$18 from their earlier projection of $15-$20. Industry experts believe that this move makes sense, keeping in mind that the cloud of economic recess might just be around the corner and growth is at best expected to be modest.

Nicely Played:

It is a precautionary move by CAT that, in my books, is appreciable as it speaks about how the company is proactive in keeping its resources still attractive by telling the investor what to expect and invest accordingly.

This uncertainty which forced CAT to revise its projections can be attributed to economic and geopolitical factors but generally the company expects the economy in 2013 to behave similarly as it has been in the current year, 2012.

Under Fire:

The question is - Did CAT really work on the projections and the market conditions like it seems to be? Was it too late?

Why I ask this is because I stumbled across news of steep cuts in capital expenditure from mining companies like BHP Billiton (NYSE: BHP) and  Fortescue Metals Group due to a slump in China's-the world's largest coal and heavy metal consumer's- economic growth rate. BHP and FMG capital expenditures took a plunge by 14% and 26% respectively even though BHP added a 8% gain over the previous quarter. There has been a lot of banter about all the economic reforms across China and Europe to boost the economy, but the Materials Industry is still wary as to whether the stimulus provided is enough or not.

China's Economy is at its worst since the global financial crisis of '08- '09 and as a direct result of that both steel and iron ore industries, amongst other mining industries, have been on a downward trajectories. Affecting BHP, CAT, GE, and almost all major players regardless of their diversity in the industry

With such news coming in, it comes as a real surprise to know that CAT acquired Bucyrus International Inc. for around $9 billion last year and agreed to acquire ERA Mining Machinery Ltd. China in November as well and has been under some pressure to reason out the moves the company has made!

A Good Time To Acquire?

CAT couldn't have got Bucyrus Inc. for cheaper, one might say. With the prices of commodities falling down it definitely is a good time for acquisitions.

GE (NYSE: GE) is poised to head in this direction, I assume from their statement, as they aim at increasing revenues from $2 billion to $5 billion mostly through acquisitions. This recent announcement has to an extent confused Investors as well especially at a time when CAT and BHP are bearish on the market. 

What an investor must take away from CAT's projection is an indication of the entire industry. With the world's largest manufacturer cutting forecast revenues, the relatively smaller ones will simply follow suit keeping CAT's projections as a base to build on their own forecasts very soon. In fact most of the large US companies have already started playing blame game by pointing at dwindling demands across the world for their financial forecasts.

No Surprise:

Given the situation, should this come as a surprise move by CAT? I don’t think so. Given the market conditions in the mining industry worldwide, the cuts had to come in sooner or later as the capital expenditure reduction and the economic slowdown had to have some effect! These revised forecasts are nothing but proactive measures that simply reflect the global situation.

Where do we stand?

This is in-fact, in my opinion, is the best time to invest in BHP- a major producer of commodities like iron ore, aluminum, copper, silver, titanium, uranium AND coal - as well. Their results are disappointing only due to global cut-downs and although their shares might be falling now, investors shouldn't feel left out when they beat the downturn. Given its diversity in the industry, BHP will remain resilient.

GE is bent upon making positive cash movements to facilitate its acquisitions which are boosted by GE Capital. Even though there is a foreseeable short term-volatility, things are bound to look good in the long run. We are expecting big acquisitions from GE instead of numerous small ones. They have a likeable strategy that grabs my attention and compels me to put my money in in spite of the risks associated!

Finally, given the policies adopted by the industry giants, CAT seems healthy for the long run. Profits are expected to come in and with the economic reforms around the world kicking in well get to see positive results soon. No wonder Wall St. analysts remain bullish of Caterpillar and believe they will continue to deliver -sooner or later-when there is a demand for its equipment. A sturdy place for a solid investment at a minimum risk.

Invest Wise!

Know What You Own

Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in the Fool’s brand new report. Just click here to access it now.


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