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Should You Buy Caterpillar or CAT-Proof Industrial ETFs?

Sweta Killa

Caterpillar CAT, which is already struggling due to global trade tensions, dampened investors’ mood following its disappointing quarterly result. This is especially true as shares of CAT tumbled as much as nearly 7% in the last trading session after the company missed estimates and gave weak guidance. However, it recovered to close at down 4.5%. The disappointing results also pushed the Dow Jones lower (read: Dow Breezes Past 27,000: 5 Stocks That Drove ETF).

What Happened?

The heavy machinery manufacturer lagged on both earnings and revenue estimates. It reported earnings per share of $2.83, well below the Zacks Consensus Estimate of $3.12, and revenues of $14.43 billion, falling shy of the estimated $14.5 billion. The worse-than-expected results are driven by higher manufacturing cost, weak demand for construction machines in Asia-Pacific, and soft sales in the company’s energy and transportation segment.

Caterpillar also lowered its earnings per share projection for 2019. It now expects it to come in the lower end of the previous guidance range of $12.06-$13.06. The Zacks Consensus Estimate is currently pegged at $12.22.

Since Caterpillar is the bellwether for the industrial sector, the dismal results and outlook will have a negative impact on investors’ sentiment.

CAT Estimate Revisions Sinking

Caterpillar has been underperformer this year on the Dow Jones Index, gaining just 3.8% compared to 16.9% gain for the Dow Jones. The stock has seen negative earnings estimate revision of three cents for this year and a couple of cents for the next over the past month, despite easing trade tensions. Additionally, this year earnings are expected to grow 8.9%, well below the industry average growth of 11.6% (read: Dow ETF Appears Strong Ahead of Q2 Earnings).

These suggest more pain in store for this machinery giant in the coming weeks, compelling investors to move away from the stock at present. The stock currently has a Zacks Rank #3 (Hold) and belongs to the bottom-ranked Zacks Industry Rank (bottom 35%). Though Value Score has been impressive at A, Growth and Momentum Score of C each reflects some volatile trading.
                                  
How to Play?

Given Caterpillar’s woes, investors wanting to avoid CAT could consider industrial ETFs that have no exposure to this machinery giant. There are a couple of them: Invesco S&P SmallCap Industrials ETF PSCI and First Trust RBA American Industrial Renaissance ETF AIRR. PSCI has a Zacks ETF Rank #3 (Hold) while AIRR has a Zacks ETF Rank #2 (Buy).

However, risk-tolerant investors might consider this as a buying opportunity with Industrial Select Sector SPDR XLI, Fidelity MSCI Industrials Index ETF FIDU and Vanguard Industrials ETF VIS. As these funds have nearly 3% exposure to Caterpillar, investors shouldn’t completely write off Caterpillar-focused ETFs from their portfolio. This is because the funds are diversified and have spread out exposure to several firms in various types of industries like aerospace & defense, industrial conglomerates, and machinery, suggesting that the space can easily counter shocks from the industry’s components (see: all the Industrial ETFs here).

XLI and VIS have a Zacks ETF Rank #1 (Strong Buy) while FIDU has a Zacks ETF Rank #2.

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Fidelity MSCI Industrials Index ETF (FIDU): ETF Research Reports
 
Industrial Select Sector SPDR Fund (XLI): ETF Research Reports
 
Invesco S&P SmallCap Industrials ETF (PSCI): ETF Research Reports
 
First Trust RBA American Industrial Renaissance ETF (AIRR): ETF Research Reports
 
Vanguard Industrials ETF (VIS): ETF Research Reports
 
Caterpillar Inc. (CAT) : Free Stock Analysis Report
 
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