Caterpillar (CAT) continues to move down and I don't believe an end is in sight. In order for Caterpillar to turn around and increase its sales, "big-ticket items" must start to move. But the state of the economic cycle the company is part of does not appear to be on the upswing. For this reason, investing in Caterpillar may be a matter of timing. It is a great company but I believe if one is interested in investing in the company one should be patient.
The ISI Group believes that investors are more concerned about the calendar myth "buy till May then go away" because the pattern has worked for the last three years. As Caterpillar continues to decline the group believes the momentum to turn the stock around will not take place until the sector can break through this "calendar risk." Not many investors want exposure to machineries' weakness due to mining companies.
It will be just after mid-April before Caterpillar reports its first-quarter results but it is already warning everybody that global retail machine sales fell by 13% from the previous year's first quarter. This is not unexpected because the first quarter is usually weak for the company. Not only did the company cut its inventory by $2 million in the last quarter of 2012, but mining companies that usually buy the big-ticket items have toned down their capital spending for big projects and it looks like these "big-ticket items" may be scarce when it comes to sales this year.
This is directly reflective of low commodity prices that cause mining companies to curb their spending. This is how the economic cycle turns. When commodity prices are low, mining companies cannot sell their metals at premium prices, which translate into revenue decreases. At this point cash flow is threatened and companies need to tighten up on their spending. This flows back to Caterpillar, which cannot sell its big-ticket items to the miners because they're tightening spending. When commodity prices increase, revenue picks up, cash flow increases and in turn they buy big-ticket items from Caterpillar. It's a cyclical relationship.
At the beginning of the year gold prices continued their downward journey that started in the last quarter of 2012. Goldman Sachs expected gold would turn downward in price as the year went on while the U.S. economy continued to look healthier. As the economy slowly inches its way up the analysts expected gold prices to continue to go down and level off over the next five years to around $1200 an ounce. This doesn't sit well with gold miners and their ability to increase cash flow to buy high-priced equipment from Caterpillar.
Copper, palladium and metallurgical coal were expected to be in demand while aluminum, nickel and zinc were least preferred. They also believe the iron ore market is headed for a long drawn out over supply; this will happen within the next couple of years but until then the market should stay fairly average. All this has an impact on sales for Caterpillar.
China is like the lottery pick of success as everybody looks to it and its economic growth as the key to financial growth. As China goes, so goes the world. The country is expected to grow this year particularly the first half of 2013. Because of the prosperity, double-digit wage growth is expected to contribute to inflation going up. This in turn leads to the Bank of China possibly raising its rates for the fourth quarter of 2013 as the powers that be are hesitant to let the economy continue to rely on a stimulus for growth. This all leads to the possibility of stimulus growth ending the second half of the year, which will also slow down the growth of the Chinese economy. This in turn will have an effect upon mining revenue and also Caterpillar's revenue.
Since it peaked the first of February, Caterpillar has continued to move down because of the poor reports of sales coming in around globe. This particular move down is strong too because the stock is not even in the middle Bollinger band. Both the RSI indicator and the MACD are at their lowest levels and continue to show that the stock remains very weak.
Because of the time of year and the state of the cyclical relationship that Caterpillar is in, I do not expect the stock to turn around anytime soon but continue to move down. It is a good company but I do not believe the "cycle" of this cyclical industry has reached its bottom. Be patient, there will be a time when investing in Caterpillar makes perfect sense.