Commodity Weakness Digs Caterpillar Into Deeper Hole

By Markets

Caterpillar (CAT), the world’s biggest maker of earth moving equipment, suffered another blow on Monday after the team at Goldman Sachs (GS) told clients to sell the stock, which has already lost over 30% of its value over the past 12-months. In a note, analyst Jerry Revich and team wrote, “We see 35% downside to consensus 2017 EPS driven by our view of structurally lower global infrastructure investment in the early stages of an extended commodity deflation cycle.”

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Simply, this signals Caterpillar won’t be selling as much equipment to commodity export countries, which Goldman notes accounts for 25% of company sales. The firm predicts Caterpillar is dealing with the early stages of a large scale decline in energy-led capital spending, while being in the middle of one for mining capital spending.

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The business climate may get worse before it gets better according to the firm: “In the last commodity deflation cycle [which began in 1983] performance didn’t turn until commodity investment started to recover in 1993,” led by upstream investments. 

Thus far, there are few catalysts for global commodities, which continue a global unwind with China remaining the biggest wild card. Oil has tumbled 70% from the highs reached in February of 2014, while copper has lost 57% since its record high reached in February of 2011.

Caterpillar joins many of the big machinery companies that are already sell rated by Goldman including Joy Global (JOY), Navistar International (NAV), KBR Inc. (KBR) and Jacobs Engineering Group (JBR).

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Last September Caterpillar disclosed it will cut as many 5,000 workers by the end of 2016 with the potential of that number hitting 10,000 through 2018. 

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Investors will get more specifics from Caterpillar management when the company reports earnings on Thursday, January 28. Analysts are forecasting quarterly revenues will fall nearly 20% to $11.4 billion.