The slowdown in China has claimed more victims, and this time they work for Caterpillar Inc. (CAT).
CAT said Thursday it will cut 10,000 jobs because of sales declines in its three main business, all of which have a connection to the diminishing Chinese economy. CAT also issued some pretty downbeat revenue outlooks.
The world’s largest maker of heavy mining and construction equipment is suffering through a multi-year period of shrinking sales tied to sluggish global growth.
The desperation at Caterpillar Inc. doesn’t bode well for the wider industrial, materials and energy sectors at all.
CAT is seen as a global economic bellwether, because companies don’t make capital investments in the type of expensive goods CAT sells if they’re not confident about their future prospects.
By that measure, multinationals are feeling very insecure, indeed. After all, CAT is taking a beating in everything it does.
As CEO Doug Oberhelman said in a statement:
“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.”
CAT Crushed by Tumbling Commodity Prices
In CAT’s construction segment, sales are falling because of dwindling activity in Asia, as well as sluggishness in other big emerging markets like Russia and Brazil, both of which are in a recession.
Resource industries, which manufactures equipment for the mining industry, is getting hit by the collapse in prices for everything from copper to gold to iron ore. As the world’s largest consumer of most commodities, a drop in demand from China has a huge effect on commodity markets. Just ask Freeport McMoRan (FCX) about its experience with that.
At the same time, CAT’s energy and transportation business is getting clobbered by the ongoing rout in oil prices, which is due in part to waning demand from China. A flood of production from the U.S. shale industry and record output from Saudi Arabia are also whacking prices for crude.
Mining and energy are doing the brunt of the damage, according to Caterpillar. No surprise there. What is more ominous is that weakness in CAT’s segment has been the state of affairs for about three years now, but it appears that things have finally come to a head.
Traders are increasingly worried that China’s problems are worse than anyone thought, and the CAT news only confirms the most pessimistic views. A major restructuring effort is usually applauded by investors. The cold-blooded market loves cost cuts, and CAT’s move is intended to save $1.5 billion annually.
Just look at how the market treated CAT stock Thursday. CAT tumbled on the news of the layoffs, dropping as much as 8% soon after the opening bell. The Dow Jones Industrial Average, of which CAT is a component, also tumbled.
CAT stock is now down close to 30% for the year-to-date, with nary a tailwind in sight.
True, CAT has been through many booms and busts before. Shares are getting cheap and the CAT dividend is up to 4.6%, but only extremely patient investors need apply. This one is going to need years to bounce back.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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