Caterpillar (CAT) earnings Thursday morning promise nothing but more pain for the world’s largest maker of heavy mining and construction equipment, so don’t be surprised if CAT stock has one of those days.
At some point, you would think the Caterpillar stock price would be sufficiently discounted to reflect the grindingly grim reality of slower emerging market growth and tumbling prices for crude oil and other commodities.
But, don’t expect any value hunters to stick their necks out just yet.
Caterpillar already braced the market for an ugly earnings report when it issued a revenue warning last month and said it would cut 10,000 jobs because of declining sales.
CAT stock touched a five-year low in the days after the announcement, but has since bounced back, gaining more than 8% since that Sept. 28 nadir. The knee-jerk reaction was overdone, or at least it looks that way in hindsight, but it also reveals what can happen to CAT stock when all the bad news isn’t baked in.
It’s hard to see CAT earnings delivering much good news tomorrow. Caterpillar is suffering through a multi-year period of shrinking sales tied to sluggish global growth. Weakness in China — as well as Russia and Brazil — were already pressuring commodity prices and, thus, demand from the mining industry. Then, the bottom fell out of prices for crude.
Global Picture Crushes CAT Stock
The bottom line is that CAT is getting squeezed on all sides. As CEO Doug Oberhelman said in a statement last month:
“At this point, we are experiencing continued weakness in key industries that we serve. We expect that will lead to our fourth consecutive year of sales decline, with our sales and revenues down about 5 percent in 2016 versus 2015. We currently expect the decline in sales and revenues in 2016 will occur in all three of our large segments — Construction Industries, Energy & Transportation and Resource Industries — with the most significant decline in the oil and gas portion of our Energy and Transportation segment.”
Naturally, analysts don’t expect growth in the most recent quarter. CAT earnings are projected to tumble to 78 cents per share from $1.72 a year ago, according to a survey by Thomson Reuters. Analysts’ average estimate for revenue stands at $11.25 billion, a 17% slump year over year.
True, CAT could beat Wall Street estimates and have an up day, or perhaps even stabilize its steep year-long downtrend.
But that’s about it. CAT stock is down 23% so far this year and there’s not much in the macroeconomic picture to warrant any significant upside soon.
Companies don’t make capital investments in the type of expensive goods CAT sells if they’re not confident about their future prospects, and with no end in sight for the rout in prices for everything from copper to iron ore to oil, CAT sales are going to be in decline next year, and possibly beyond.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
