Heavy-equipment manufacturing giant Caterpillar (NYSE:CAT) has had to deal with some unlucky breaks in recent years. Yet as difficult a time as the company has faced with so many challenges to overcome, the current crisis that Caterpillar has in front of it could well prove to be the last straw for the equipment-maker's efforts at showing investors that it's capable of generating consistent and reliable growth over the long run. Even after enduring slowdowns in many parts of the world and some bad timing with its strategic moves, the shocking plunge in energy prices could crush Caterpillar's hopes to avoid slipping back into the downward phase of its highly cyclical business.
Chronicling Caterpillar's struggles
Like most companies in its industry, Caterpillar has seen huge amounts of volatility in recent years. The stock soared to all-time record highs during the commodities boom of the mid-2000s, with high levels of construction activity also bolstering Caterpillar's business prospects. During the economic recession in 2008 and the subsequent stock market meltdown, the company followed most of its peers in posting huge losses that lopped off more than two-thirds of its share price. And in the immediate aftermath of the financial crisis, Caterpillar managed to post an impressive recovery that caused the stock to start setting new record highs once again within just a couple of years.
Yet Caterpillar's timing has been far from perfect. In late 2010, the company announced it would buy mining-equipment giant Bucyrus, giving it greater exposure to the red-hot mining industry. At the time, gold and silver prices were at their highest levels in decades, and mining companies were rich with cash and could afford to spend heavily on capital equipment. Within two years, however, the bottom fell out of the precious-metals mining industry, with gold and silver prices plunging and taking away capital budgets from Caterpillar's mining-equipment customers along with them.
Caterpillar has also had trouble with the ups and downs of the global economy. Throughout much of the 2000s, Caterpillar's rising focus on the Chinese market looked like a smart move, with growth rates easily exceeding what the company could generate in more mature economies like the U.S. and Europe. Yet when China's seemingly endless expansion finally started to slow, it led to a much faster reduction in the pace of sales growth for Caterpillar than investors had expected, and as a result, the share price has remained largely stagnant for more than three years now.
Why energy could become Caterpillar's latest failure
One saving grace for Caterpillar, however, has been the soaring U.S. economy. Lifted by a successful recovery, the U.S. has defied the sluggish conditions that Japan, Europe, and most of the emerging-market nations around the world have experienced. Helping to drive that recovery was a flood of foreign investment, as well as the promising boom in domestic energy production, thanks to innovative new oil and gas drilling methods and myriad new finds across the nation.
Indeed, Caterpillar has looked to capitalize on the rise of energy by shifting its strategic focus. Although Caterpillar still remains committed to the construction-equipment market, it has also identified the energy and transportation segment as a potential answer to its growth problems. As recently as just a few months ago, Caterpillar's focus on energy looked like a viable way for the equipment maker to temper the cyclical volatility of its construction- and mining-equipment businesses, with the company pointing to predictable expectations of massive growth in the sector during the next 30 years.
Since then, though, energy prices have fallen through the floor, with crude oil prices tumbling from above $100 per barrel to just over $53 as of this writing, and showing signs of further potential drops ahead. As a result, the strong profitability of Caterpillar's energy and transportation business could well be at risk, as potential customers tighten their capital-spending belts and defer purchases of expensive equipment.
Moreover, even though the transportation business serves non-energy industries like railroads, the collateral impact of falling energy prices on railroad companies could also have a detrimental impact on sales. Railroads have increasingly relied on shipping crude oil out of hard-to-reach areas of the country, as well as shipping much-needed chemicals related to recovery processes like hydraulic fracturing to aid the efforts of oil and gas exploration and production companies. If oil's price drop lasts for a while, it could easily hurt railroads, as well, removing another bastion of strength from Caterpillar's support structure.
What's ahead for Caterpillar stock?
So far, Caterpillar has seen only minimal declines in its share price despite the plunge in crude oil. Unfortunately for the construction giant, though, it's only too likely that Caterpillar will see one of its few remaining reliable segments of its overall business finally give way to tough times. That could send Caterpillar shares on a downward trajectory from which it could take months, or even years, to recover.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.