Caterpillar (NYSE:CAT) was one of the worst-performing industrial stocks in the S&P 500 in 2018, falling 19.4% for the year, according to data provided by S&P Global Market Intelligence as tariffs, global slowdown fears, and weakness in the energy sector weighed on sentiment. Earnings held up well for the construction and mining equipment maker, but quarterly results were crowded out by geopolitical tensions and fear that the global economy is beginning to slow.
Caterpillar execs have attempted to downplay the significance of trade tensions between U.S. and China, noting that China accounts for less than 10% of revenue, but there is no question that tariffs and the potential for a slowdown in China are weighing heavily on the stock.
China might be a small portion of overall business, but it is an important source of future growth for Caterpillar. And Chinese consumption factors heavily into global demand for energy and raw materials, impacting purchasing decisions around the world.
Cat's valuation surged in 2016 and 2017 -- the stock was up nearly 70% in 2017 alone -- on strong worldwide demand for construction and mining equipment, and a series of significant guidance hikes by the company as a result. Caterpillar's earnings have continued to come in strong, with sales up 18% year over year in the third quarter and earnings per share up a whopping 63%, but an operations-based hike in guidance was noticeably absent.
The company's 2018 stock performance, then, seems largely attributable to investor fears that the best part of the cycle is over for this highly cyclical company. Even after the decline, Cat shares have still doubled over the last three years, a warning sign that in the event of a serious recession, the stock would likely still have a lot further to fall.
Absent a quick truce in the U.S./China trade spat and clear evidence that China's economy is not slowing, it's hard to imagine Caterpillar shares quickly gaining back what they lost in 2018. That said, the company is healthy and figures to be around for the long haul. It also has a solid 2.7% dividend yield and a history of hikes to reward patient investors who are willing to ride out the commodity cycle.
My bet would be that although China is indeed slowing, the worst-case scenario of a global recession will not materialize. If that's the case and you have a long enough time horizon to ride out the weakness, it might be a good time to take a look at Caterpillar shares.