Caterpillar Stock Still Faces Multiple Headwinds

CAT stock - Caterpillar Stock Still Faces Multiple Headwinds

One of the catalysts for this week’s dramatic fall in the equities markets was Caterpillar’s (NYSE:CAT) quarterly report, which caused a large decline in CAT stock price.

The results also showed that investors are very nervous about industrial operators. That point is also illustrated by the drops in other companies like 3M Company (NYSE:MMM), Fastenal (NASDAQ:FAST) and Sealed Air (NYSE:SEE).

When Caterpillar’s third-quarter report came out on Tuesday, CAT stock plunged by 7.6%. But that was not the end of the declines of CAT stock price. Yesterday there was another drop of nearly 6%. Since mid-September, CAT stock has gone from $156 to $116.

The irony is that the quarterly report showed that the company’s business remains strong. Its adjusted earnings came to $2.86 per share, which beat analysts’ consensus estimate by 2 cents per share. Revenues jumped 18%, hitting a company record, and all of the company’s major businesses grew meaningfully.

So what happened? Why were investors so bearish on CAT stock? Well, first of all, Caterpillar’s earnings beat was fairly minimal, indicating some underlying weakness. Keep in mind that, for the past few years, the company has consistently pulled off much larger beats.

Also concerning was the fact that the company did not raise its adjusted earnings guidance for 2018. Moreover, the midpoint of its 2018 EPS guidance was $11.50, but analysts’ consensus outlook was $11.64.

The Headwinds Facing Caterpillar Stock

But of course, when it comes to CAT stock, there are some wildcards. Perhaps the most notable one is the trade tension between the U.S. and China. The fact is that the ultimate impact of the conflict is difficult to gauge as the scale of the tariffs is unprecedented.

But the trade war has already had a negative impact on CAT. Last quarter, the tariffs increased the company’s costs by $40 million. For the whole year, it appears that the tariffs will raise CAT’s costs by more than $100 million.

True, for a company as large as CAT, those numbers are manageable. But then again, they are tough to predict as well, and the conflict could raise unexpected issues for CAT’s global supply chains. After all, even more tariffs may be on the way.

Another problem for CAT stock is the company’s rising material costs. They increased about 2% year-over-year quarter, as tariffs have led to higher steel prices. Meanwhile, the company’s freight expenses have been increasing.

Even though Caterpillar expects to pass these cost increases onto its customers, doing so could pressure its sales. Besides, with tariffs remaining in effect, the growth of the global economy could slow, with Asia getting hit especially hard. And that could result in less demand for CAT’s products.

Bottom Line on CAT Stock Price

The Caterpillar brand is hugely valuable, and the company also is the world’s largest construction and mining equipment maker. Those advantages will be key as the economic situation gets dicey.

The company has also continued to invest heavily in its product line. Just last week, it launched several new mini-hydraulic excavator models, which not only have high levels of performance and safety but also should appeal to a broad customer base.

Additionally, CAT has been focused on creating innovative autonomous systems. Such technology should improve productivity and safety and lower costs.

However, in the meantime, these factors may not mean much. Right now, Wall Street is rotating out of cyclical companies. And while CAT stock will probably perform better than its peers, CAT stock price could still come under further pressure until the outlook of tariffs and global growth becomes clearer. So for now, it’s probably worth waiting awhile before buying Caterpillar stock.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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