Why Caterpillar Stock Is Dropping Today

Caterpillar (NYSE: CAT  ) is dragging on the Dow Jones Industrial Average (DJINDICES: ^DJI  )  lower after the mining and construction equipment manufacturer reported weaker-than-expected sales in emerging markets. As of 1:20 p.m. EDT the Dow was basically flat at 17,076. The S&P 500 (SNPINDEX: ^GSPC  ) was less than a point above breakeven for the day.

Caterpillar reported mixed second-quarter earnings earlier today. Earnings came in at $1.57 per share, up 4% from the year-ago quarter's $1.45 per share and above analyst expectations of $1.52 per share. If you strip out one-time restructuring costs, earnings were an even stronger $1.69 per share. Looking forward, the company raised its earnings guidance for the year to $5.75-$6.20 per share. Despite the positive earnings, however, Caterpillar is down 3.7%. What gives?

Caterpillar is down today because of its declining revenue and lowered sales forecasts. Revenue came to $14.15 billion, down 3% year over year and below analyst expectations of $14.4 billion. Management lowered its full-year sales forecast from $53 billion-$59 billion to $54 billion-$56 billion. While emerging-market sales were expected to be weak given Caterpillar's previous monthly sales disclosures, investors were still unpleasantly surprised by how weak they were.

The main culprit is Caterpillar's mining equipment sales, which are down 29% worldwide since the prior-year quarter. North America is the one strong region, with mining sales down just 9% and construction sales up 20% year over year. In every other region -- Latin America, Europe, Africa, the Middle East, and Asia -- mining industry sales are down between 35% and 40%. These downtrends are combining to push Caterpillar's trailing 12-month sales down for the sixth consecutive quarter.

CAT Chart

CAT data by YCharts.

I don't expect Caterpillar's sales story to get any better in the short term, as China looks to be facing a credit bubble that should continue to weigh on worldwide growth for some time. With sales continuing to decline, Caterpillar can only cut so many costs. It's hard to justify paying over 17 times forward earnings for a company facing serious headwinds.

There's at least one investor willing to pay that amount, however. Caterpillar announced it plans to repurchase $2.5 billion worth of stock in the third quarter following its purchase of $1.7 billion in the first quarter. By the end of the third quarter, Caterpillar will have purchased more than double the $2 billion purchased in 2013. I worry that Caterpillar is paying a high price for its own shares, destroying value for shareholders. Only time will tell. I plan to be on the sidelines.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3043072, ~/Articles/ArticleHandler.aspx, 11/28/2014 10:53:40 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement