By Neal Rau
Caterpillar Inc. (NYSE:CAT) shares are down 12% from the highs earlier this year. The economic slowdown in China has been a major factor in underperformance of the company's stock. With the positive recent industrial production numbers released by China, should investors be buying shares of CAT now?
Caterpillar stands to benefit from a recovery in China, and recent economic reports from China indicate that growth is picking up. August industrial production increased by 10.4%, beating analyst expectations, and exports increased by 5% last month, much more than the 2% expected. Also, China's PMI reached a 16 month high. Caterpillar's stock has underperformed the overall market partly because of the recent slowdown in that region, so investors would welcome signs of that region improving.
Revenue from the company's resource industries division in the Asia-Pacific declined by 44% in the first half of the year, compared to a year earlier. That particular region is responsible for 88% of the company's Asia sales decline. With the heavy equipment maker so dependent on mining in China, a bounce back in that region would be a positive for the stock. Shares of Caterpillar have been trading in a range since May, and are currently near a test of long-term resistance. Yes, even after the decline, CAT is near a resistance level, and that is a red flag.
In July, Caterpillar reported its Q2 earnings of $960 million, or $1.45 per share, down 43% from last year's $1.7 billion, or $2.54 per share. The company blamed weak demand for heavy machinery as a primary cause for the drop in earnings. Caterpillar lowered its outlook for fiscal year 2013 from earnings per share of $7 to earnings per share of $6.50, but the company said it expected some pickup in 2014.
Competitor Joy Global Inc. (NYSE:JOY) was less optimistic when it reported disappointing earnings about a month later, as the company said its quarterly earnings plummeted 36% from the year before. Joy Global said its order book and backlog was continuing to diminish because of cuts from companies like Peabody Energy Corporation (NYSE:BTU) and Arch Coal Inc (NYSE:ACI). Joy Global, which gets two-thirds of its revenue from the coal industry, said customers have cut new equipment sales by as much as half, and reduced expenditures for repair services as well. The company warned that these trends could accelerate through 2014 and even 2015. Caterpillar is less reliant on coal, but being the world's largest manufacturer of mining equipment, the company would be heavily impacted if Joy Global's outlook for 2014 and 2015 were more accurate than its own more positive outlook for next year.
Another sign of Caterpillar's optimism is the fact that the company continues to buy back shares, and recently upped its dividend by 15%. However, Caterpillar remains dependent on the mining industry and construction in China, and both continue to show signs of a slowdown. Investors will be watching for indications of a reverse in the global mining slowdown.
Shares of Caterpillar are trading very close to long-term resistance. If the stock tests resistance and remains below resistance, as defined in our real time trading report, Stock Traders Daily expects lower levels and a test of support even with the optimistic news coming from the company itself. Obviously we make money by trading on price, not the opinion of management. That would make CAT a sell/short at resistance, with risk controls defined as a break above resistance.