CAT’s Problems Mean Avoid This Entire Sector (CAT, DE, JOY)

Anyone looking for the poster child for the stock market’s bouts of fear, uncertainty and doubt need look no further than global mining, metals, engine products and diesel-electric locomotive engine maker, Caterpillar (CAT).

After announcing a major structural transformation, including layoffs of about 10,000 employees over the next three years, and a reorganization plan aimed at saving $1.5 billion in costs, CAT stock sank 6% while touching lows not since 2010 in intra-day trading.

Let’s look at the long, slow and painful ride for CAT shareholders (and employees), and what’s to come for both the stock and it’s battered sector.


Year to date, CAT is down nearly 30%, while its shares have dropped 35% over the last year.

On a longer-term basis, CAT stock is down nearly 20% over the last five years.

On the employee side, CAT has slimmed down by 31,000 since 2012.

CAT’s problems mirror those of the market, representing all that scares the daylights out of the Street: Sluggish future revenue growth, lowered earnings expectations and estimates, and uncertain economic and sector (in this case, mining and commodities) dynamics.

Of course, CAT is not alone…

U.S.-based multinationals are wrestling the same beasts: a Chinese economy so opaque that nobody is sure what it really looks like on the ground, a still-evolving and unsettled European economy, emerging market atrophy, and finally, here at home, steady—if not spectacular—growth.

What has made life even more difficult for CAT is that mining and commodities markets in general are in the doldrums, dampening the need for CAT’s line of equipment.

CAT’s biggest problem, China, is contagious. The company, like so many before it, including giants Kimberly-Clark (KMB), Intel (INTC), Wal-Mart (WMT) and MasterCard (MA), among many others, are married to the Chinese market.

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Investors across the board can expect continued bumps in the road—and with them, revenue and earnings ups and downs.

Take CAT, for example. Mixed in with its layoff and restructuring news were some dismal 2015 top and bottom line projections.

Keep in mind that 2015 marks the third consecutive year of declining year-over-year revenues.

A main culprit in CAT’s second-quarter disappointment: difficulty in China.

Asian-Pacific region revenues clocked in at $2.24 billion, roughly 18% of total company revenue for the quarter. However, those revenues represented a 21% drop year-over-year, and CAT doesn’t see an uptick anytime soon.

In fact, with expectations of a drop on both lines for 2016, it will mark the first time in the company’s 90-year run that it managed to see declines for four consecutive years.

It may not stop in 2016…

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While CAT expects substantial savings from layoffs and restructuring, top-line growth will still be a struggle.

CAT’s tumble and struggles doesn’t bode well for some of the bluest of the Blue Chip manufacturers, either.

Share of agriculture and construction manufacturer Deere (NYSE: DE), and mining equipment maker Joy Global (NYSE: JOY) dropped in sympathy with CAT.

The near future looks particularly bleak for all concerned, for virtually the same reasons.

However, investors looking for a bright spot can, of course, always point to these companies’ strong dividend histories and yields…

JOY shines brightly here, with a 5.41% yield. CAT registers a 4.79% yield. Deere weighs in at 3.26%.

The good news is that with these stocks looking at prices nearly 50% off 52-week highs, strong-willed long-term investors will continue to get paid while waiting for future turnarounds in the sector.

It will be a long road. CAT’s problems, and those of its big-machinery cousins, run deep.

Best to stay away for now and let the dust settle.

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