Caterpillar Inc. (NYSE:CAT) stock has steadily marched in one direction so far this year: south. Shares of the heavy machinery manufacturer shed 13.9% in the first half of 2018, according to data provided by S&P Global Market Intelligence, with June turning out to be its worst month so far. Macro factors have largely dictated the cyclical company's fortunes, as is the case now.
From an operational standpoint, Caterpillar is firing on all cylinders, targeting its highest-ever GAAP earnings per share (EPS) of $9.75 to $10.75 in fiscal 2018 after delivering a record first quarter. Unfortunately, investor optimism about the stock is drying up for a couple of reasons.
It all began with the broader market weakness earlier this year that dragged down Caterpillar shares. A cautious overtone from management during the company's first-quarter earnings call in April added fuel to the market's fears. While Caterpillar still projects strong sales for the year, management's comments that Q1 adjusted EPS could be the "high water mark for the year" sent investors into a frenzy.
In reality, Q1 was an exceptionally strong quarter and the company continues to grow its sales at a strong pace. For instance, Caterpillar reported 24% growth in worldwide machinery retail sales for the three months ended May. On the flip side, it is the lowest growth so far this year among the five rolling three-month periods that Caterpillar has reported sales for. In other words, Caterpillar's sales growth appears to be decelerating at a time when trade war tensions are heating up.
The risk is real for Caterpillar: The company derives a substantial chunk of its sales from international markets. In fact, Caterpillar is particularly bullish about China and expects the market to be the largest contributor to its sales, particularly construction equipment, from the Asia-Pacific region. For perspective, Asia-Pacific clocked the highest sales growth of 44% during the company's first quarter, led by strong demand for China.
Not surprisingly, Caterpillar shares have lost significant value ever since President Donald Trump pulled the trigger on a trade war with China some weeks ago. A full-blown trade war could hit Caterpillar really hard, even compelling the company to downgrade its full-year outlook.
Caterpillar's upcoming second-quarter earnings report and call on July 30 should give investors a better sense of where the stock's headed. Watch out for its guidance and keep your ears open for any cautionary statements that management might make. Caterpillar's fortunes are tied closely to commodity markets and global economies, so even the slightest of disturbances anywhere could prove a major hurdle for the company going forward.