What happened
Shares of construction, mining, and energy equipment company Caterpillar (CAT 0.07%) fell 17.2% in June, according to data provided by S&P Global Market Intelligence. The move comes in concert with a general sell-off in stocks the market thinks are exposed to cyclicality in the economy. Caterpillar is one of them. So whether it's construction, mining, aggregate (mainly used for road building), energy, or transportation equipment, Caterpillar's end markets will ebb and flow with the economy.
You can see that in the chart below showing long-term revenue and earnings before interest, depreciation, and amortization (EBITDA). In particular, note the decline a few years after 2014. This reflects the slump in mining and energy spending in response to the fall in energy and mining commodity prices.
Data by YCharts
So what
In a nutshell, the market is stressing over the economy's future and, in particular, commodity prices in light of the recent hike in interest rates by the Federal Reserve. Of course, such events are usual in rate tightening cycles, but investors need to keep some perspective. A softening in commodity prices would have a negative impact on capital spending on the kind of machinery Caterpillar offers. However, it could also reduce Caterpillar's costs and help out the company's profit margins. In addition, it's far from clear that investment in mining and energy equipment doesn't need a multiyear increase anyway, given the slump in spending since 2014.
Caterpillar will suffer if the economy falls off a cliff in the coming years. On the other hand, it could muddle through and emerge in a moderately growing environment with Caterpillar's costs (steel, etc.) moderating while construction, mining, energy, and infrastructure are still in multiyear-expansion mode. In this scenario, the market would likely start looking at Caterpillar more positively.
Now what
The company's upcoming second-quarter results and commentary will be interesting. In April, management told investors to expect "margins to improve in the second half of the year compared to both the first half and the comparable period of 2021." So it will be interesting to see if management maintains that outlook and what it says about industry spending trends in 2022.
