The mining and construction equipment stalwart in the U.S., Caterpillar (CAT, Financial), is under immense pressure since the mining industry is showing weak signs of revival across the globe and mainly at the home turf and China which are the major geographical regions contributing to the honcho’s topline in the past years. Though the U.S. construction business has been looking up in 2014, the softness in the mining industry has already ridden Caterpillar into the red though its generating positive cash flow to maintain the dividend payout to its investors. Caterpillar has already hinted at the cost-savings initiatives it has been taking since late 2013 till date to keep a control on its expenses as headwinds are trying to bust its business model. Just a day back the stock has received a couple of downgrades which further spells bad news for the company enlarge. Let’s dive into the details shared on the downgrade which sends a clear message that Caterpillar’s top and bottom lines are under fire.
The downgrades are noteworthy
Caterpillar was downgraded by analysts at JPMorgan Chase & Co. (JPM, Financial) from a “neutral” rating to “underweight” rating in a research report issued on January 5. Soon after the downgrade, investors were tensed whether their investments were safe and this led the stock to the negative territory down by almost 1.5% in the same day’s pre-market trading session.
This downgrade comes after the free slide seen in oil prices which is expected to take a toll on Caterpillar’s upcoming profits. JP Morgan downgraded shares of Caterpillar with a $80 price target down from $95, citing the machinery maker’s direct exposure to oil and gas and indirect exposure to mining –Â both of these are serving as immediate headwinds pulling down its top and bottom lines to a considerable extent. The firm stated that the machinery honcho’s exposure to oil and gas totaled around $6.5 billion, which represented nearly 12% of its total revenue earned as it supplies turbines to offshore rigs as well as provides reciprocating engines and transmissions for on-site drilling.
Though the construction equipment business line seems firm for Caterpillar, JP Morgan has opined that the U.S. construction equipment demand since 2010 has been largely correlated with the expansion of fracking, and thus it expects to see a slowdown in such equipment demand in 2015.
Following J.P.Morgan’s move, stock analysts at Evercore ISI downgraded Cat’s stock from a “buy” rating to “hold” rating setting a price target of $84 on the stock, down from the previous target of $112. On an average, the Cat stock has a sell rating by two analysts, a hold rating from thirteen analysts, and a buy rating from seven analysts.
The stock is facing the heat
On the day of the downgrades, the stock traded down 5.28%, hitting $87.03. Caterpillar has a one-year low of $85.88 and a one-year high of $111.46.
Due to the sliding oil prices, Caterpillar’s shares have become a victim to this free fall with shares having fallen 5.6% in the past three months, while the S&P 500 has just fallen 0.03%.
To conclude
Caterpillar’s fortunes seem to be victimized as oil prices continue to slide creating further headwinds in execution of its business model. There is obviously more to find out after the earnings results are out and till then investors might short sell the stock to keep themselves in the safe horizon.
