Caterpillar, Inc. (NYSE:CAT) shares seem to be popular with retail investors since it has one of the most well-known brands in the world. It makes very cool heavy machinery that ranges from earth movers to mining and forestry equipment. However, Wall Street analysts have become increasingly bearish and that might be because Caterpillar appears to have a multitude of challenges that some retail investors may not fully recognize yet. Caterpillar has been downgraded by a number of top investment banking firms in recent weeks. Let's take a closer look at the downgrades and the challenges facing Caterpillar:
One of the most recent downgrades came from Zacks Investment Research. On May 28, it downgraded Caterpillar to a strong sell and it cited sharp downward estimate revisions after Caterpillar reported
disappointing first-quarter results on April 22. For 2013, estimates were revised downward by 14.8% to $6.90 per share. For 2014, estimates were revised downward also by about 14.8% to $8.10 per share.
On April 17, 2013, Caterpillar shares were also downgraded by analysts at Macquarie. On April 23, analysts at UBS (NYSE:UBS) also downgraded Caterpillar and lowered the price target to $85, which is very close to what the stock is trading for now.
On April 3, 2012, analysts at Goldman Sachs (NYSE:GS) downgraded Caterpillar to neutral from buy. The research report from Goldman Sachs stated: "We remain constructive on Caterpillar's leading returns and franchise and its structurally higher construction-equipment margins, but in an over-supplied commodity environment we no longer see upside to consensus earnings expectations,"
As the chart above shows, Caterpillar shares were trading around $98 in January but have trended lower almost ever since. The chart also shows a "head & shoulders" formation which is a technically bearish pattern that could indicate further underperformance and additional downside risks.
Caterpillar has already been impacted by weakness in the mining sector since industrial metals like iron ore have seen significant price declines. The coal industry which also uses mining equipment and other earth-moving machines has also been troubled by weak demand and lower prices. These issues appear to be known by many investors and analysts, so these negatives are probably already priced into the stock. However, there are two fairly recent challenges that some investors might be overlooking and these issues might begin to impact financial results in the coming quarters:
1) Gold and silver prices have recently plunged and many believe that the downtrend could continue. This price weakness and volatility is likely to create a great deal of uncertainty for many companies in this industry. This could lead some firms to reduce capital expenditures and mining expansion plans. It takes time for capital expenditure budgets to be rolled back and for this impact to be felt. That is why precious metal companies could be the next sector to reduce purchases from Caterpillar.
2) Foreign currency exchange could be a much larger problem for Caterpillar. Japan's new Prime Minister, Shinzo Abe has introduced new monetary and fiscal policies that have led to a significant drop in the value of the Yen. Basically, Japan is now trying similar "quantitative easing" policies that the Federal Reserve has implemented and this could drive the Yen down further over the coming years. Take a look at the chart below of Japan-based Kubota (KUB), which also makes heavy machinery. This stock has been surging as investors have been snapping up all sorts of Japanese stocks in order to benefit from the potential export boom that a devaluing Yen can create. With the yen plunging by nearly 10% in the past several weeks, Kubota may begin to take business from Caterpillar in the coming quarters.
Caterpillar is a great company that manufactures high quality products. However, there appears to be little the company can do about a major plunge in the yen, or about recent challenges in the precious metals sector. These two challenges are relatively new and might not yet be priced into the stock. The bearish chart pattern for Caterpillar and the bullish chart for its Japanese rival should not be overlooked either. Cautious investors might want to see how much impact these issues may have in the coming quarters before considering this stock.
Here are some key points for CAT:
- Current share price: $85.80
- The 52 week range is $78.25 to $99.70
- Earnings estimates for 2013: $6.90 per share
- Earnings estimates for 2014: $8.01 per share
- Annual dividend: $2.08 per share which yields 2.4%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.