Caterpillar Inc. (CAT) will be a bargain-basement buy one day, but as Thursday’s first-quarter earnings warnings show, a recovery in CAT stock won’t be coming soon.
As much as any multinational, CAT is getting killed by global macroeconomics. The world’s largest manufacturer of heavy construction and mining equipment is highly sensitive to prices of oil, copper and other commodities. Weak global growth — particularly in emerging markets — and the strong dollar are also putting the hurt on Caterpillar.
None of this is news, of course. Caterpillar has been struggling with these headwinds for many quarters now. That explains CAT stock’s slight uptick after issuing a downbeat forecast.
The problem is that Caterpillar’s problems are mostly not of its own making.
True, it shouldn’t have invested in building up its mining business just ahead of the commodities collapse, but what’s done is done. That means Caterpillar has little control over what ails it. Macro conditions are driving poor results.
Caterpillar is just going along for the ride.
Don’t believe it? CAT stock began its long decline almost exactly at the same time oil prices did. Since mid-2014, shares have lost a third of their value. Oil prices have had a steeper decline, but Caterpillar stock has traded almost in lockstep with them.
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Have a look at the chart, which uses the United States Oil Fund LP (ETF) (USO) as proxy for prices of crude.
Caterpillar’s Guidance Comes With an Asterisk
Oil and gas are only part of the story, of course. The slowdown in China and other developing countries is responsible for weak metals prices and a drop in construction as well. The strong dollar is another killer.
For the current quarter, Caterpillar projects first-quarter revenue at $9.3 billion to $9.4 billion. Analysts, on average, were looking for $10.34 billion, according to a poll by Thomson Reuters.
Caterpillar set its Q1 earnings-per-share forecast at 50 cents to 55 cents. On an adjusted basis, EPS is forecast to come in anywhere between 65 cents and 70 cents a share. Meanwhile, Wall Street anticipated the current quarter to be 97 cents.
Interestingly, CAT is actually a tiny bit optimistic for the back half of 2016. Its Q1 guidance was below Wall Street estimates, but the company maintained its full-year view.
We’ll see.
The huge divergence between Caterpillar’s Q1 outlook and the Street’s view points to how difficult it is to model CAT’s business these days. Take that less-than-pessimistic full-year outlook with a grain of salt.
There’s no reason for CAT stock to begin a recovery until the market sees a hint of higher oil and metals prices on the horizon. Caterpillar shareholders just have to live with the fact.
At some point, shares will be a buy ahead of the other side of the economic cycle. For now, however, new money should stay away, and current investors need to remain very, very patient.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
