Caterpillar (CAT) stock will become a bargain when the market finally overestimates any future damage done by sluggish global growth, a strong dollar and weak prices for commodities. But as Caterpillar earnings revealed once again, CAT stock still isn’t sufficiently cheap.
CAT stock started tumbling in the days leading up to its second-quarter release as the market anticipated yet another quarter of revenue weakness, which turned out to be more than justified.
The selloff, however, wasn’t enough. CAT missed Wall Street’s revenue estimate and, by extension, its full-year outlook. The market always hates it when a company guides lower.
As a result, CAT stock gapped down 3.4% at the opening bell, and is now down about 16% for the year-to-date and 29% over the last 52 weeks. The last time CAT stock fell to the mid-$70s price range was in 2011.
Mind you, this action comes on what was essentially a ho-hum” quarterly report.
The world’s largest maker of construction and mining equipment is getting squeezed by slower economic growth, particularly in emerging markets like China and Brazil. This dim macroeconomic picture has led to lower prices for everything from iron ore to copper.
Low oil prices and a stronger dollar have added to CAT’s woes, but this sort of trend has been going on for years. The Q2 report was not a nasty surprise.
Just yesterday, United Technologies (UTX) — another blue-chip industrial — reported its own disappointing earnings for the same reasons.
Apart from slashing costs — and buying back their own stock — there’s not much multinational companies like CAT can do to improve their bottom lines.
This CAT Doesn’t Land on Its Feet
On an adjusted basis — which is what the market cares about — Caterpillar earnings matched forecasts at $1.27 a share, down from $1.69 a share in the year-earlier period. Revenue fell from $14.15 billion a year earlier to $12.32 billion, but analysts were looking for $12.62 billion.
The most recent shortfall in the top line forced CAT to cut its full-year revenue forecast by about a billion dollars to $49 billion. (The company maintained its full-year adjusted earnings target of $5 a share, thanks to the countervailing effects of expense reduction and stock buybacks.)
Cost cuts and buybacks can limit the downside to CAT stock, but what Caterpillar needs to recoup losses is a stronger global economy. CEO Doug Oberhelman told CNBC that Caterpillar needs a global growth rate of 3% to 3.5% to grow revenue, but it’s dealing with an actual rate of just 2% to 2.5%.
As for Caterpillar stock right now, it’s just not there yet. At least not until the market fully discounts all of CAT’s macroeconomic headwinds
CAT stock changes hands at more than 16 times forward earnings, but over the last five years, the average price-to-earnings ratio is a bit less than 14. That suggests Caterpillar shares have farther to fall before value investors set something of a floor.
If you have CAT in your portfolio, by all means, hold on. It might take a long time, but the cycle will eventually turn.
If you’re looking to commit new money to CAT stock, chances are good that you’ll get it cheaper if you’re willing to wait.
As for this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
