CAT Stock Slapped With Sell on Caterpillar’s Exposure to Oil

Caterpillar Inc. (CAT) stock had yet another disappointing year thanks to sluggish global growth and a weak outlook for the mining industry. Sadly for anyone holding CAT stock, the new year isn’t shaping up to be much brighter now that oil prices are in free fall.

CAT Caterpillar stock Inc. (NYSE:CAT)Indeed, the new year has hardly begun and analysts at J.P. Morgan investment bank have already slapped what amounts to a rare “sell” rating on CAT stock.

As CAT stock investors know all too well by now, if it’s not one thing, it’s another. CAT stock hasn’t gone anywhere for about four years. The world’s largest maker of mining and construction equipment doubled down on the mining industry just as the commodity supercycle came to an end, and that has led to years of pain.

And it’s not just sharply slower growth in China that has the mining industry struggling with lower prices for everything from copper to coal. Japan and much of the eurozone is either in recession or darn close — another kick in the head for demand for mining and construction equipment.

The bottom line is that CAT stock finished 2014 almost exactly where it started. Despite a few short-lived forays above $110 (and some trips to the low-$80s) CAT stock has traded around $90 since 2011.

Now that the bottom has fallen out of the oil and gas market, there’s little reason to expect a breakout in 2015, either.

CAT Stock Sinks on Oil Prices

Oil prices are down more than 50% since their June peak, hurt by abundant supply (thanks to North American shale oil), and too little demand (courtesy of sluggish global growth.) Caterpillar has significant exposure to the oil and gas industry, and that’s why analysts at JPMorgan Chase just issued an “underweight” rating (sell, essentially) on CAT stock.

The average shale oil producer needs oil prices of at least $70 per barrel to break even, so there’s pretty much no incentive to expand production when prices are closer to $50. That doesn’t bode well for sales of Caterpillar equipment to the North American fracking industry. As the analysts wrote in a note to clients:

“Our analysis suggests that since 2010, U.S. construction equipment demand has been strongly correlated with the expansion of fracking and, as a result, we would expect to see a slowdown in equipment demand in 2015.”

As we saw with their tumbling stock prices last year, the oil drillers and oil services companies are getting crushed by falling oil prices. There’s no need for new wells when there’s a glut, which means less demand from CAT’s clients in this critical business.

Indeed, from turbines for offshore rigs to transmissions for on-site drilling, J.P. Morgan analysts estimate that CAT sales to the oil and gas industry come to $6.5 billion annually, or about 12% of total revenue.

No, CAT is not an energy sector stock, but it’s trading like one. At some point it may become too big of a bargain to ignore, but for now, CAT stock is at the mercy of the oil market, and that’s a bad place to be.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities. 

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