Caterpillar To Grow At A 3x Pace Compared To Broader Markets?

by Trefis Team
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Caterpillar
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Going by trends seen during the 2008 crisis, Caterpillar (NYSE:CAT) could potentially outperform, and grow at around 3x the pace of the broader market, when the current crisis is over. We compare the performance of Caterpillar vis-à-vis the S&P 500 in our interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: Caterpillar Compared with S&P 500So far, Caterpillar stock has largely followed the trends in the broader markets in the recent coronavirus and oil price war related market crash. The stock has declined 27% since early February, as compared to a 28% fall for the S&P 500 (through March 20). This can be attributed to fears of recession in the global economy, and the impact of the current crisis on Caterpillar’s business. With the current oil price war, the production in the U.S. will likely be impacted, resulting in lower dealer inventory levels. Note that roughly half of the company’s total sales are generated from the North America region. Moreover, the coronavirus outbreak has forced various governments to impose lockdowns, which will likely result in reduction of mining activities in the near term. While these factors explain the correction in Caterpillar’s stock over the past few weeks, in this analysis, we take a look at how the company’s stock reacted to the economic crisis of 2008 and compare its performance with the S&P 500.

  • On Monday, March 16, the stock markets saw one of the biggest declines ever with S&P down 12%. For the week ending, March 20, 2020, S&P was down 15%.
  • There are two distinct trends driving the sell-off. Firstly, the increasing number of Coronavirus cases outside China is causing mounting concerns of a global economic slowdown. Secondly, crude oil prices plummeted by more than 30% after Saudi Arabia increased production.
  • Caterpillar stock fell 21% over the last 10 trading sessions, (between March 9, and March 20), and 27% since early February, considering the impact that the outbreak and a broader economic slowdown could have on the company’s business.
  • Going by the trends seen during the 2008 economic slowdown, it’s likely that CAT stock could see strong recovery, and it will likely outperform the broader markets, when the crisis winds down.
  • In a time of crisis, stocks that are highly leveraged typically don’t fare very well. If we look at industrial companies, Caterpillar’s cash-to-debt ratio stood at 0.32 in 2019, as compared to 0.13 for Deere & Company. These ratios indicate that Caterpillar is less leveraged when compared to Deere & Company.

Caterpillar Stock versus S&P 500 Over 2020 Coronavirus/Oil Price War Crisis

  • Caterpillar’s stock declined by 21.3% between March 9, 2020, and March 20, 2020, and the stock is down by 27.3% since February 1, after the WHO declared a global health emergency.
  • The S&P 500 declined by 22.5% between March 9, 2020 and March 20, 2020 and it has fallen by 28.5% since February 1.
  • We also compare the current coronavirus crash to 4 other market crashes here.

Caterpillar versus the S&P 500 During 2007-08 Financial Crisis

  • CAT stock declined from levels of around $55 in October 2007 (the pre-crisis peak) to $18 in March 2009 (as the markets bottomed out) and recovered to levels of about $43 in early 2010.
  • Through the crisis, CAT stock declined over 67% from its approximate pre-crisis peak. This marked a decline steeper than the broader S&P, which fell by as much as 51%.
  • CAT stock saw massive recovery from the lows, rising by over 139% between March 2009 and January 2010. The growth was almost 3x higher than the S&P, which rose by about 48% over the same period.

Conclusion

  • While Caterpillar stock has declined due to the coronavirus and oil price war crisis, going by trends seen during the 2008 slowdown, it’s likely that it could bounce back strongly, when the crisis winds down, and the growth from lower levels could potentially be around 3x higher than the broader S&P.

For more detailed charts and a timeline of the 2008 and 2020 crisis for different stocks, view our interactive dashboard analyses on coronavirus.

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