The 3 Scariest Sectors in the Dow Jones Industrials

There are three parts of the Dow that have seen revenue plunge the most recently. Find out which and why.

Dan Caplinger
Dan Caplinger
Apr 27, 2014 at 9:05AM

Growth is an important part of the success of the stocks in the Dow Jones Industrials (DJINDICES:^DJI). Over the course of the five-year bull market, most of the Dow's components have shown that they can rebound from the depths of a deep recession. But lately, stocks in three sectors have had difficulty keeping sales from dropping, and that could eventually have a big downward impact on their shares. Those three industries are heavy equipment, energy, and pharmaceuticals, and Caterpillar (NYSE:CAT), ExxonMobil (NYSE:XOM), and Merck (NYSE:MRK) have had the biggest challenges in keeping revenue from dropping, based on comparing trailing 12-month revenue figures from S&P Capital IQ to those from a year ago.

Caterpillar's nearly 12% drop in revenue makes plenty of sense when you consider the economic difficulties that the construction- and mining-equipment manufacturer has faced. Caterpillar relies on healthy markets not just in the U.S. but also in key emerging-market areas like China, and slowing growth rates in the developing world and stagnant or even downright contractionary activity in construction and infrastructure spending in Europe and elsewhere in the developed world have combined to send Caterpillar's sales tumbling. Add to that the huge drop in mined-commodities prices over the past year, and you have a recipe for disaster at Caterpillar. Recently, the heavy-equipment giant has suggested that things might finally be bottoming out, but especially for Caterpillar's mining-company customers, it might still be a while before they're willing to make major capital expenditures again.

Energy companies are dealing with the constant struggles of replacing lost production from aging wells and dealing with a changing price environment for crude oil and refined products. Oil prices have been on the rise lately, and so some of the pressure that has sent ExxonMobil's revenue down 8% could finally let up in the future. Still, as Exxon and the Dow's other major energy component compete to tap promising prospects around the world, it'll get even more difficult to find undiscovered oilfields to replace played-out assets. High dividends and extensive share buybacks help cushion the blow for shareholders, but in the extreme long run, Exxon will have to address the supply challenges that will almost certainly force the entire planet eventually to consider alternatives to fossil fuels.

For Merck and other pharmaceutical companies, the revenue declines are likely to be shorter-lived. Merck has seen revenue fall about 7% due largely to blockbuster drugs going off-patent, with new generic competition stopping drugmakers from charging premium prices to patients. But Merck and its peers are working hard to replace those lost blockbuster sales with newly developed drugs with similar potential, and while those prospects are hard to come by, drug companies have had success with some of their newer treatments.

Of these three sectors, energy's sales issues will be the hardest to overcome, as they're limited by physical supply that's out of companies' control. By contrast, Caterpillar's woes look purely cyclical, and pharmaceutical companies like Merck show signs of finding new drugs to replace lost revenue relatively soon.