What Is Driving Caterpillar’s Stock Down?

Caterpillar’s (NYSE: CAT) stock declined by 5.3% on Monday, January 5, the steepest decline since October 23, 2013. ^[1] At a time when Caterpillar is in troubled waters, investors have been selling off their shares in a bid to capture some profits. The stock was also affected by a rating downgrade by JPMorgan. While already suffering from weakness in demand for mining equipment, Caterpillar is now under pressure due to weak construction equipment sales and declining crude oil prices. Despite Caterpillar having consistently grown its bottom line in the midst of a weak top line, it does not seem to have impressed investors.

See our complete analysis of CAT here

Crude Oil Price Declines Driving Negative Sentiment

The decline in crude oil prices have been dragging down Caterpillar’s stock price. On January 5, Crude oil futures for February 2015 delivery on the New York Mercantile Exchange fell to the lowest levels since April 2009, settling at $50.04 per barrel. ^[2] Sales to the oil and gas industry account for more than 25% of Caterpillar’s Energy & Transportation revenue and a considerable portion of its Construction Industries revenue. Therefore, the decline in oil prices is likely to have a negative impact on Caterpillar.

In a recent interview with CNBC, Doug Oberhelman, Caterpillar’s Chairman and CEO, pointed out that the declining oil prices will surely have an impact on the company but are unlikely to be as major as the slump in mining equipment sales. ^[3] Also, the company’s operating expenses are likely to benefit from the decline in oil prices.

Caterpillar’s Machine Retail Statistics Remain Weak

The ongoing weakness in demand for mining equipment is the primary reason behind Caterpillar’s declining revenue. Huge asset write-offs and declining commodity prices have forced mining companies to reduce their capital spending in terms of purchasing new equipment or spare parts. As a result, the revenue of Caterpillar’s Resource Industries segment, which sells mining equipment, declined 37.3% year-on-year in 2013 and 27% in the first nine months ended September 30, 2014.

Retail statistics released by Caterpillar for the three month rolling period ended November 2014 shows that mining equipment sales remain weak. For the better part of the year, the decline in Resource Industries retail sales was moderating. However, the trend broke in November, with retail sales declining 23%, compared to a 20% decline in the three months ended October. ^[4]

Caterpillar’s Construction Industries retail sales also continued to fall, with the declines becoming heavier through the year. Retail sales declined 6% in the three months ended November, compared to 5% in the three months ended October and 3% in the three months ended September. The weak Brazilian economy and a tough year-on-year comparison with Latin American markets have taken a toll on CAT’s Construction Industries segment. In 2013, CAT had received large orders from Brazil’s government which had significantly increased sales, leading to tougher comparisons in 2014.

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1. Caterpillar Historical Prices, www.yahoo.com/finance [↩]
2. Oil Prices Tumble to Fresh Lows, January 5, 2015, www.wsj.com [↩]
3. CAT CEO: We’ll see impact from oil no question, December 22, 2014, www.cnbc.com [↩]
4. Caterpillar Retail Statistics, www.caterpillar.com [↩]