Sales bounce back after Cat nap

While Western Australia is a lot bigger than one man and one company, with a bit of imagination it is possible to see the state through the financial health of a firm that sells equipment to the mining industry, and the personal wealth of a man with the biggest stake in that business.

Caterpillar, the US-based maker of earthmoving equipment used extensively by mining and other industries, was in serious decline for the four years from 2012 to 2016, a time that coincided with a lean period in the development of new projects.

Kerry Stokes, who owns 73 per cent of Seven Group Holdings – the Perth-based company that holds the licence to sell and service Caterpillar equipment in WA and other parts of Australia via its WesTrac business – had watched his fortune fade during that time.

The downward slide stopped two years ago, and while not everyone in WA is feeling the upturn, it is starting to filter through to the wider community in the form of job creation, business investment and a slow recovery in property prices.

Tracing the turn from a negative to a positive trend can be done in a number of ways, some quite technical and one quite easy, and that’s to see whether the corporate and private leaders in a community are getting richer.

In the case of Mr Stokes, the past two years have been particularly fruitful, with the value of his 207 million shares in Seven Group rising by a handsome $2.3 billion, from less than $900 million in 2016 to more than $3.2 billion today.

The recent downturn in the stock market has rubbed some of the gloss off the value of his Seven shares, as it has done to the portfolio of every investor.

At one stage, when Seven shares hit an all-time high of $17.16 on February 2, Mr Stokes’ shares were valued at $3.55 billion.

Shifting share prices are not always a reliable indication of wealth, however.

The best way to measure that is through profits, and in the case of Caterpillar and Seven, a rising trend can be seen as demand for heavy equipment rises at a time of synchronised global growth.

Caterpillar’s recovery is best shown through a graph compiled by the Wall Street Journal newspaper, which traces the company’s boom years up to 2012 and the slide down to 2016, followed by last year’s 18 per cent recovery in sales to $US45.5 billion.

In the resources sector category, which covers mining and oil, Caterpillar reported a strong recovery in demand for equipment, mainly in North and South America, but with the Asia Pacific region (including Australia) showing signs of solid growth.

Seven’s WesTrac division, which retrenched a large number of employees when the downturn started in 2013, is looking for 37 new workers in WA with a wide variety of openings in Perth and at country sites.

A hint of the upward trend was contained in Seven’s profit last financial year, when first signs of the revival softened a 22 per cent decline in sales.

Signs of the improvement included forward orders, as mining companies are forced into an inevitable equipment replacement cycle with old machines – kept alive by replacing parts – being overtaken by sales of new equipment.

It’s the switch from a parts and maintenance focus, which can be very profitable, to the main game of selling new equipment that has restored investor interest in Caterpillar by US investors and in Seven by Australian investors.

On the New York Stock Exchange, Caterpillar’s share price has risen by 70 per cent during the past year. Seven is up by 80 per cent over the past 12 months and 250 per cent over the past two years.

An updated look at how Seven is performing is scheduled for later this month when the company releases its December-half result, with closest investor attention likely to be paid to the performance of WesTrac, which is the company’s engine room, along with two other key divisions.

Oil and gas, which incorporates a 36 per cent share of the rapidly expanding Beach Energy business, has emerged as the second most important part of Seven.

Once a company struggling to survive, Beach Energy is now valued on the stock market at $2.7 billion, enough for a spot in the exchange’s top 150.

Media, once the second string in Seven’s bow, has been buffeted by declining advertising revenue and changing reader/viewer habits, best illustrated in Seven West Media’s share price, which has declined from a peak of $16 in 2007 to recent sales at an all-time low of 51.5 cents, valuing the company at $780 million.