Cost-Cutting Saves a Cautious Caterpillar Inc.

Following the drop in monthly dealer retail sales stats that Caterpillar reported last week, the market was ready for the heavy equipment manufacturer to completely go over the cliff when it reported fourth-quarter earnings this morning. That it handily beat analyst expectations is a cause for hope, but it's no reason to feel euphoric; there's still plenty to be worried about even if the worst fears haven't been realized. 

As we've had the misfortune to chronicle these past few months, Big Yellow dealer sales have yet to stop the pattern of falling month after month after month. It's now recorded 13 straight months of declining worldwide sales, and even if it was only a slightly less worse December than November, you need to transport yourself back almost four years in time to see an equally dismal resort.  

Yet on the strength of construction and power systems sales, Caterpillar was still able to say fourth-quarter profits rose 45% to $1 billion ($1.54 per share) from $698 million ($1.04 a share) in the year-earlier period, even as revenue fell to $14.4 billion from $16.1 billion. The mining industry's woes continue to weigh on performance as revenues in the segment tumbled 48% on slack demand as miners cut back on capital expenditures.

Barrick Gold slashed expenses in a bid to keep up with the falling price of that precious metal and just reset reserve estimates based on a per-ounce price of gold of $1,100, well below the $1,500 price it used last year. Other gold miners are expected to follow suit, too.

Resource miners like BHP Billiton, Vale, and Rio Tinto have similarly cut capex, fired workers, or sold assets, while Arch Coal has "diligently" been reducing costs. Analysts say mining industry capex tumbled more than 25% last year and may drop another 20% or more in 2014.

Joy Global is the world's second-largest mining equipment manufacturer, relying even more heavily on the coal industry's health than Caterpillar does (two-thirds of its sales coming from coal miners), and it's been dialing back expenses too as fourth-quarter bookings plunged 19%.

However, Caterpillar has been on a "cost lockdown binge" for months to meet the new lower demand, slashing tens of thousands of employees from the payroll, which ended up helping it maintain strong cash flows. As a result, the heavy equipment maker says it expects adjusted earnings for 2014 will be $5.30 per share, or when you back out restructuring costs they'll come in at $5.85 per share, up from prior expectations of $5.77 per share.

Cat remains hopeful that its cash position remains strong enough that it anticipates buying back some $1.7 billion worth of stock during the first quarter, and as much as $10 billion worth by the end of 2018. 

It's being helped by some better than expected results in construction, a sector that the Census Bureau says hit its highest levels spending since March 2009 in November, and Deere continues to sound a hopeful tone for construction equipment, projecting 10% sales growth for 2014. While I've been expecting Caterpillar to make this U-turn for a while now, I'll offer a word of caution about it. 

Although the National Association of Realtors points to 2013 as the best year for housing in the past seven, and the downturn the sector saw in December was blamed on poor weather, existing home sales missed expectations for four consecutive months and even the realtors association was forced to admit the industry's strength was sapped as the year progressed. The residential construction market is just not as strong as it appears. Much like Cat's results, the numbers are only just less bad, not good.

Still, with Caterpillar's retail dealer sales of industrial power systems having surged 30% last month, there is a basis to believe that Wall Street's worst-case scenario won't pan out and the heavy equipment manufacturer has found enough traction to dig itself out of the hole it's found itself in.