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Caterpillar Stock Plunges 16% YTD: What’s Hurting the Stock?

Zacks

Caterpillar Inc. CAT has been grappling with a plethora of headwinds of late, including a weak manufacturing sector, the coronavirus crisis and the oil price rout. These, in turn, have been weighing on its overall results and share price performance.

Shares of this Zacks Rank #4 (Sell) manufacturer of construction and mining equipment have lost 15.5% on a year-to-date basis, compared with the industry's decline of 16.4%. The company has a trailing four-quarter negative earnings surprise of 3.27%, on average.


Factors Impacting Caterpillar

The U.S.-China trade war and waning global demand had already taken a toll on the U.S manufacturing sector, and the coronavirus pandemic has only aggravated the scenario. Per the Institute for Supply Management’s report, the U.S Purchasing Managers’ Index (PMI) came in at 41.5% for April — the lowest since April 2009 when it registered 39.9%. In May, the PMI came in at 43.1%. A reading below 50 denotes contraction.

Reflecting the overall slowdown in the sector, Caterpillar’s order backlog was at $14.1 billion at the first quarter end, down a substantial $2.8 billion from the prior-year quarter. Further, the company’s global retail sales recorded a decline of 23% in the three-month period ended May 2020 — levels last witnessed in February 2016. This can be attributed to overall weak performance across all regions and segments. The company has also been reporting declines in its monthly retail sales for six consecutive months now.

These factors along with the anticipated impact of the coronavirus pandemic and the related global economic uncertainty is weighing on Caterpillar’s performance. Suspension of activities in the mining and construction sectors to check the spread of the virus have taken a toll on the demand for Caterpillar’s equipment. The company also had to suspend operations temporarily at certain facilities on account of supply chain issues, weak demand or as per government mandates. Currently, approximately 75% of the company’s primary production facilities are operational. It has cautioned that it may suspend operations temporarily at additional facilities if necessary.

Mining customers will remain disciplined with their capital expenditures this year due to low commodity prices, which in turn will impact Caterpillar’s sales. In Energy & Transportation segment, demand will be particularly weak in the oil and gas sector on account of low oil prices and sluggish capital spending at customers end.

The Zacks Consensus Estimate for 2020 earnings has gone down 22% over the past 60 days. The estimate is currently pegged at $4.94, indicating a decline of 55% from the year-ago reported figure.

Stocks to Consider

Some better-ranked stocks in the Industrial Products sector are Lakeland Industries, Inc. LAKE, SiteOne Landscape Supply, Inc. SITE and Axon Enterprise, Inc. AAXN. While Lakeland Industries and SiteOne Landscape Supply sport a Zacks Rank #1 (Strong Buy), Axon carries a Zacks Rank of 2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Lakeland Industries has a projected earnings growth rate of 418% for 2020. The company’s shares have soared 116% so far this year.

SiteOne Landscape Supply has an expected earnings growth rate of 15% for the current year. The stock has appreciated 19% year to date.

Axon has an estimated earnings growth rate of 14.4% for the ongoing year. Year to date, the company’s shares have rallied 31%.

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