Caterpillar (NYSE:CAT) Announced an Inventory Build-Up- Is the Timing Right?

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By Hanson So on December 13, 2014 Consumer Staples

Mining companies, like Caterpillar (NYSE:CAT), are experiencing low equipment sales due to the reduced prices and asset write-offs. According to the latest reports, equipment sales of Caterpillar (NYSE:CAT) are running low these days due to the lowered capital spending that the company has allocated for the purchase of new machinery. The resource revenue of Caterpillar (NYSE:CAT) fell by 37.3 percent on the yearly basis; however, the company is confident about its future.

During a recent press meeting, Caterpillar announced that it is planning on organizing a strategic inventory of its machinery. The market analysts are now faced with the question as to whether this strategic equipment build-up will change the condition of the company.

Caterpillar (NYSE:CAT) will build-up an inventory base that will include those machines and components which are most likely to see a huge demand rate once the mining market picks up again. Since the demand in the mining industry is quite volatile, an inventory build-up will allow the company to cater to the needs of people at the earliest. Caterpillar has decided to gather equipment, for the market is likely to change in the upcoming quarters.

Mining companies are extensively using their new machines in order to keep the costs of operations at a minimal level, at least in the short term. The reason for using new machines is solely cost based; older equipments need frequent repairs and replacements. Caterpillar is of the view that the aftermarket machine segment will rise soon. Perhaps, this is the reason why the company is so confident about its future.

According to the retail statistics of Caterpillar (NYSE:CAT), the resource sales were on a decline for the whole year. It is pertinent to mention here that the decline was moderate. The company saw a peak decline of 49 percent in the month of April; since then, the rate has fallen down to 20 percent. Caterpillar will see good numbers in the upcoming quarters, for the sales of mining equipment have bottomed out. And even if they are not, they will bottom out very soon.

It is very important that Caterpillar (NYSE:CAT) time its inventory build-up right. If the company embarks upon this task too early, its manufacturing costs will go up with no profits at all for a while, which can hurt its margins.

The last couple of quarters have shown that the company can manage its margins even at the times of declining sales: Caterpillar (NYSE:CAT) saw an 8 percent increase on yearly basis during the third fiscal quarter of the year 2014, despite the fact that the revenues were not so strong. The company has improved its guidance outlook from $5.75 to $6 for the year 2014.

Coming to the stock prices of Caterpillar (NYSE:CAT), the stocks of the company are currently being traded in the range of $89.96 to $92. It has a market capitalization of $54.79 billion with a P/E (price to earnings) ratio of 14.64.