The trade war with China has reignited, and while the tech companies may be getting the headlines, export-oriented industrials have also felt immediate effects. China is an important market for heavy construction and agricultural equipment, and the imposition of protective tariffs has made a mark on the import-export trade.
We’ll dive into TipRanks’ analyst database to look at two major industrial companies feeling the pain from China, as well as one strong defensive play to minimize the hurt on your portfolio.
Caterpillar, Inc. (CAT – Research Report)
Despite beating expectations in the China market earlier this year, Caterpillar now says it expects full-year China-sales results to come in flat at best. This is a serious setback, as Caterpillar makes 10% of its global sales to China. Combined with a drop in operating margin – reported at 18.5% last month, down from 19.7% one year ago – the company is facing a serious headwind in East Asia.
Quoted in Canada’s Globe and Mail newspaper, five-star analyst Stephen Volkmann (Track Record & Ratings) noted both points, saying, “Caterpillar has most exposure to China in their construction industry business and that business was just a bit disappointing on revenue and margins.”
Caterpillar stock has had a difficult time gaining traction in recent years, as its share price peaked in January 2018 and has been on an uneven downward slope since then. With the end of Q2 2019, the company moved to placate shareholders, by boosting the dividend 20% to $1.03 per share ($4.12 annualized), which increased the yield to a respectable 3.37%. Shares gained $4 in the next session but are down $17 since.
While CAT is facing headwinds, the outlook is not entirely gloomy. Oppenheimer’s Noah Kaye (Track Record & Ratings) set a ‘Hold’ on the stock, but his comments acknowledge that the company has extensive resources: “We got much of what we were looking for from CAT’s Investor Day last week. The company provided an updated view on its structurally improved cross-cycle margin and cash flow metrics… We believe CAT’s O&E model has successfully enabled the company to deliver stronger cash generation peak-to-trough and supported its strong balance sheet, enabling a more shareholder-friendly approach to capital allocation.”
Overall, CAT retains a ‘Moderate Buy’ from the analyst consensus, including 9 buy, 3 hold, and 2 sell reviews. Shares sell for $122 as of May 20, and the average price target of $150 suggests a 22% upside potential.
Deere & Co. (DE – Research Report)
Nothing runs like a Deere, but investors ran away from Deere shares after the May 17 Q2 earnings report. The manufacturer of agricultural equipment (from backyard riding mowers to giant agribusiness harvester combines, plus everything in between) missed the EPS forecast by 2%, reporting $3.52 against the expected $3.61. Despite the earnings miss, net equipment sales revenues came in just above the $10.12 billion expectation, at $10.3 billion.
According to the company, however, investors should not expect to keep seeing revenue beats this year. Deere lowered guidance on 2019 net income from $3.6 billion to $3.3 billion. Company CEO Sam Allen said of the lower guidance, “Although the long-term fundamentals for our businesses remain favorable, softening conditions in the agricultural sector have led Deere to adopt a more cautious financial outlook for the year. The lower forecast is partly a result of actions we are taking to prudently manage field inventories, which will cause production levels to be below retail sales in the second half of the year.”
DE shares dropped 7.5% after the earnings report.
Wall Street’s analysts have also seen the weakness in DE, even those setting ‘buy’ ratings on the stock. From RBC Capital, Seth Weber (Track Record & Ratings) says of the lowered income guidance, “…the revision is not surprising in light of the U.S.-China trade tensions and bad weather.” He lowered his price target by 10%, to $175.
Stanley Elliot (Track Record & Ratings), of Stifel, also notes the softness in the agribusiness sector. He says the lowered income projection is driven by “a cocktail of negative developments in terms of trade, late plantings and swine flu.” His price target, $171, suggests a 26% upside for the stock.
Deere holds a ‘Moderate Buy’ rating on the analyst consensus, based on 5 buy, 4 hold, and 1 sell rating given in the past three months. The $155 average price target that indicates a 14% upside potential from the current share price of $135.
Johnson & Johnson (JNJ – Research Report)
Consumer health care companies, emphasizing the everyday items that everyone needs no matter the state of the economy, are among the stocks usually seen as ‘recession proof.’ This doesn’t mean that they won’t drop when the market drops; rather, it means that they’ll experience less volatility. You can expect these defensive stocks to outperform when the major indexes fall or make slow gains, but they’ll also tend to lag a bit when the markets see a sharp rise.
Johnson & Johnson is a classic case. JNJ released its Q1 earnings, missing the EPS by 2 cents, on April 16. Since then, the stock has slipped, risen, and slipped again, and is flat overall. On a longer-term view, JNJ is up 7.3% year-to-date and 11.4% over the past 12 months.
The S&P 500, for April, is down over 2%, and in the last 12 months is only up 4%.
Outperforming market slips is not JNJ’s only defensive attribute. The stock pays out a regular dividend, currently 95 cents per quarter for a 2.75% annual yield. The company has made a policy of steady, if modest, dividend increases, dating back to the early 1990s.
The analysts, of course, have taken note of JNJ’s dependability in delivering profits and rewarding shareholders. Raymond James analyst Jayson Bedford (Track Record & Ratings), just after the earnings report, raised his price target to $147 (for a 6% upside), and said, “Growth was still much better than expected, which gives us more confidence in our estimates.”
More recently, five-start analyst Joanne Wuensch (Track Record & Ratings) of BMO Capital, noted JNJ’s attraction in a down market. In her note on the stock, she said, “J&J's discipline to acquire and divest assets in its health care portfolio, its pristine balance sheet and its high dividend yield make the stock a strong defensive choice.” Her price target, $157, suggests an upside potential of 13%.
JNJ maintains a ‘Moderate Buy’ analyst consensus rating, based on 6 buys and 5 holds given in the past three months. Shares sell for $138; the average price target of $148 indicates a modest upside potential of 7%.