Why Caterpillar Stock Is Dropping Today

Continued sales declines at Caterpillar have many worried about the health of the global economy.

Jul 24, 2014 at 1:32PM
Longview

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.

Dan Dzombak has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers