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Caterpillar is one of the big winners today, and its earnings are lifting the entire market.Remarkably, domestic sales were incredibly strong, including a — get this — 92% increase in North American construction equipment spending.
How on Earth is that possible considering how bad the US construction industry actually is? There’s been virtually no recovery anywhere on this front.
How did that happen?
It turns out, end demand wasn’t the story. Instead, equipment renters — middlemen, basically — had let their old fleets get so old that they were forced to refresh their stocks.:
And we’re seeing that in customer fleets and we’re seeing it in dealer rental fleets. We believe customers are beginning to buy enough machines now to slow or stop their fleets from continuing (inaudible). Let’s be clear, though, we do not think this is any kind of a bubble. It’s
not the customers are buying more than they need and judging by what we’re see nothing dealer rental fleets, we’re not seeing increases in either fleet size or reduction in fleet age. We believe there are essentially buying enough to keep their fleets from continuing to degrade. Let me give you a few statistics about North American dealer rental fleets that illustrate that point. Let’s start with BCP products and rental fleets, small and compact machines. Rental fleet sizes are still very close to the recession lows and the fleet is older than its ever been.
That’s weird when you see management explicitly say that they’re not seeing a bubble. It’s obvious the company recognises heavy purchases that aren’t — at least right now — justified by end demand.
It came up more on the Q&A, as analysts wondered about the disconnect between these fleet purchases and the punk construction market:
<A>: Good morning, Steve.
<Q>: I’m wondering I guess if I could start with a little philosophical
question, Mike, you talked about how sales is being driven by some
replacement in the fleets and that as you pointed out a lot of the
fundamental drivers like construction spending and so forth haven’t kicked in
yet. How long do we think we can continue to drive these types of strong
sales just based on that type of demand and when do we need the actual end
mark tote really start to kick up for us?
<A>: I don’t know if I would put a time on it, but what I would tell you
right now is I think we’re in a position where dealers would like to increase
rental fleet sizes, I think they would like to improve the quality of fleets.
For a lot of product we are producing as much as we can like excavators, for
example. We’re capacity constrained. I think there still needs to be more I
think upgrading of the fleets before even before thinking about I would
say construction led demand from construction spending. Now this is going to
sound like maybe an odd comment, but in a lot of ways this has been pretty
good for us. I think that as the U.S. wore back with big housing starts to
highway build improvement in commercial construction, it would have been
very, very tough given the strength in emerging markets, I think for us to
deal with that. At the end of my intro there, that is partly why we have all
those investment capacity additions.
<A>: I’ll just add to that, it is Doug Oberhelman here. I’m not going to put
a timeframe on it, either, but if you really look at what’s happening in the
U.S., it’s a very slow recovery and very low numbers for us, which means all
that is in front of us. Rebuild, customer ageing fleet rebuild and
construction activity, so Mike is exactly right. We are in a very good
position in this recovery where we can really get our factories in order, we
can apply CPS Cat production discipline and get this going so that when the
construction activity rebounds in the developed world, call it the U.S. and
certainly western Europe, we’re going to be ready. I don’t know the
economists would have a better view of when that is going to happen than I
do, but that day is coming.
Got that? For now, the company thinks it has more sales possible to rental fleets, despite the fact that end need isn’t there. And also the company says it’s “good” because this has allowed it to keep up with emerging market demand (which is, presumably, legitimately hot).
So the bottom line is: Caterpillar’s strong North American results shouldn’t be read as any sign that construction or anything is booming in America. The middlemen are buying because they need to make up for ageing fleets, and they hope the end demand will match that.