In 2011, Caterpillar shelled out more than $8 billion for South Milwaukee, Wis.-based mining equipment manufacturer Bucyrus International Inc. It was the biggest acquisition in the company's history. A year later, the company opened its checkbook once again, spending about $700 million on China's ERA Mining Machinery Ltd.
Last January, ERA was marred by a financial scandal that cost Cat $580 million. Scandals aside, Mr. Oberhelman's investment is foundering because macroeconomic trends have hammered demand for ore. Sales in Cat's resource industries segment, which is principally mining, declined 42 percent from 2012. In the third quarter, mining revenue made up only 22 percent of sales compared with 32 percent the year before. And with commodity prices still flagging and the demand for mining equipment still lackluster, that only means more bad news for Cat in 2014.
"It begs the question: If mining is not a key driver, as investors what do we do?" said Mircea Dobre, a senior analyst at Milwaukee-based Robert W. Baird & Co. "Do we wait four or five years, or is there something else that is going to drive growth?"
That something won't be construction, Cat's oldest business. In October, the company reported that construction equipment sales were down 7 percent and its operating profit fell by 43 percent year-over-year. The company said it expects construction sales to grow in 2014. It did not say by how much.
Perhaps more promising is Cat's power systems division, a diverse grouping of generators and engine products for a wide range of uses, including oil rigs, boats, locomotives and wind turbines. The segment's sales, while down slightly, are faring much better than mining thanks in part to the boom in oil and gas drilling. Power systems fell 7 percent last quarter compared with mining's 42 percent drop.
Today, power systems provide the largest piece of Cat's sales, with 37 percent in the third quarter. But most impressive are its high margins, which analysts say made up about half of Cat's third-quarter operating profit. In fact, in the first nine months of 2013, power systems accounted for more than two-thirds of Cat's nonfinancial operating income. This is a far cry from the same period in 2012, when mining and resource industries provided more than half of Cat's operating earnings.
"(Mining has) come down so far so fast that it does not have as much downside anymore. So now power systems become a lot more important," said Larry De Maria, a New York-based analyst at Chicago's William Blair & Co.
Caterpillar declined to comment on its strategy for power systems, citing a "quiet period" preceding its fourth-quarter earnings report in two weeks. Caterpillar's stock closed at $90.51 on Jan. 10, down 9 percent from its 12-month high in February 2013.
While there are pockets of strength in the power systems business—primarily oil and gas and rail—analysts say the diversity of the segment means its potential is somewhat limited and hard to predict. "I think it's very difficult to have a good sense and good visibility in this business," Mr. Dobre said. "I personally am not expecting to see a lot of growth next year, but it certainly will perform better than what we've seen out of mining."
To stop the bleeding from mining, Cat has spent the last year liquidating inventory, reducing its workforce by more than 13,000—about 9 percent—and closing or idling plants with temporary layoffs. While its efforts have saved the company $700 million in costs and reduced capital expenditures by about $400 million, analysts still are questioning the long-term strategy.
"Everything that we've heard thus far has been reactive. The question is: What are they going to do on top of it?" Mr. Dobre said.
In an October earnings call, Ann Duignan, an analyst at New York's JPMorgan Chase & Co., pressed Mr. Oberhelman for clarity on Cat's path forward.
"I appreciate what you are saying that when your volume is down this much, it is hard to manage bottom line," she said. "But I guess I would push back and say, are you really moving quickly enough? And when can we expect to hear what's next? When are we going to hear about all these things you are looking at?"
Mr. Oberhelman said people would hear more in January.
In the meantime, analysts say investors' patience is waning.
"It feels like right now everyone is questioning the management team," said Joel Tiss, senior analyst at New York's BMO Capital Markets Corp. "When Doug Oberhelman came in, he was like a god who was going to fix everything that was wrong with Cat. Four years later, people are wondering: 'What is this guy doing and why is he the CEO?'"
This report appeared in Crain's Chicago Business magazine, a sister publication of Tire Business.