The Chinese economic slowdown and the drop in global mining activity have served as strong headwinds for heavy-machinery makers Caterpillar (NYSE:CAT) and Joy Global (NYSE:JOY), which have both seen business conditions deteriorate at an alarming pace over the past year.
Add in the fact that a famous short-seller recently brought Caterpillar squarely into his crosshairs, and you'd be tempted to think the entire group should be avoided. However, one stock in the space has been a strong executor in the current environment, because of its focus outside mining activities.
In the wrong business at the wrong time?
That's what legendary investor and noted short-seller Jim Chanos had to say about Caterpillar when he announced his short position. In his estimation, Caterpillar is too heavily focused on the mining industry and booming construction in China, which he believes are both exhibiting demand far above historical norms.
Investors need to give credit where it's due, and at least for now, Chanos' bearishness is right on the money. After all, Caterpillar recently reported a lackluster second quarter, in which earnings per share collapsed 43% year over year.
Going forward, the environment for Caterpillar should remain difficult. The company expects earnings per share of $6.50, which would represent a 23% decline from 2012 EPS.
Nowhere is the weakness in global mining activity more evident than in the recent performance of Joy Gobal, which saw its third-quarter bookings plummet 36% year over year. Overall, Joy Global's third-quarter operating profit fell 8.5% during the quarter.
Pronounced weakness in several of the company's key markets should concern investors. The company notes that in particular, the extremely challenging coal environment in the United States was the major culprit for Joy Global's poor results. Indeed, bookings for Joy Global's underground mining equipment collapsed 43% in the most recent quarter.
Going forward, the situation isn't expected to improve much for the rest of the year. Joy Global is slowing the pace of several new projects, which should put a damper on growth.
What a difference agriculture makes
Deere (NYSE:DE), meanwhile, is in a markedly better position than Caterpillar and Joy Global. This is due largely to Deere's lack of heavy exposure to mining; instead, it relies mostly on the agricultural industry.
Deere's Agricultural and Turf operating segment, which makes up roughly three-quarters of the company's revenue, has excelled through the first nine months of the year. Revenue and operating profit in the segment are up 12% and 23%, respectively, through the first three quarters of 2013.
The company is realizing both higher shipment volumes and prices, and the outlook for this market should remain robust going forward. The company expects high commodity prices and strong farm incomes to continue to support strong results, and the Agricultural and Turf segment is expected to deliver at least 7% sales growth for full-year 2013.
A Foolish opportunity in the making?
Caterpillar represents a riskier proposition than Deere. Its earnings are going in the wrong direction, and while it's always tempting to try to pick the bottom for struggling stocks, it's unclear when the global slowdown in mining will reverse.
For that reason, investors would be wise to take a wait-and-see approach to Joy Global as well. Joy Global management is extremely cautious about its future outlook, noting that the company is nearly at the end of its backlog depletion, and continuing weakness in the coal market will suppress results going forward.
On the plus side, Caterpillar is actively buying back shares and recently upped its dividend by 15%, which underscores management's optimism that the future will be brighter than the recent past.
At the same time, there's simply much less risk of catching a falling knife when it comes to Deere. Because of the continued strength of agricultural activity, Deere's present and future are bright.
While both Caterpillar and Joy Global could be long-term winners, there's no denying Deere's vastly more favorable operating environment. As a result, investors should favor Deere among these heavy-machinery stocks.
Robert Ciura and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.