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Caterpillar Hurt by Coronavirus, Weak Oil: Bet on These 5 Stocks

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Caterpillar Inc. CAT, the world's leading manufacturer of construction and mining equipment, is grappling with a host of headwinds at the moment — a weak manufacturing sector, the coronavirus crisis and the oil price rout. Caterpillar’s global retail sales recorded a decline of 11% in the three-month period ended February 2020 — levels last witnessed in December 2016 — thanks to weak performance across all regions and segments. This marks the third consecutive month that Caterpillar’s global retail sales have been in the negative territory.

The Resource Industries segment’s sales declined 7% in February – the fourth straight month of negative growth. Sales in the Construction Industries segment were down 11% — the third consecutive month of decline. Sales in the Energy & Transportation segment declined 4%. The segment has been contracting for five consecutive months.

Caterpillar’s fourth-quarter 2019 top line failed to impress investors. Sales declined across the board, thanks to weak demand and consequently dealers continued to lower inventory. Nevertheless, the company delivered year-over-year improvement of 3% in earnings per share (EPS) driven by strong cost control measures.

Muted Guidance

For 2020, Caterpillar expects adjusted EPS between $8.50 and $10.00. The mid-point of the guidance indicates a decline of 16% from 2019. End user demand is projected to decline by about 4-9% compared with 2019 and dealers are anticipated to continue reducing inventories.

However, the company had provided this guidance before the coronavirus outbreak took the shape of a pandemic. We expect a downward revision in guidance shortly, taking into consideration the impact of the coronavirus and plunging oil prices.



Downward Estimate Revisions

The Zacks Consensus Estimate for Caterpillar’s 2020 earnings is pegged at $9.34, suggesting a decline of 15.6% from the prior year. The estimate has gone down 1% over the last 30 days. Further, Caterpillar has a trailing four-quarter negative earnings surprise of 0.12%, on average.

Price Performance



Over the past year, Caterpillar shares slumped 31% compared with industry and the industrial products sector’s decline of 26% and 16.8%, respectively. Meanwhile the S&P500 dipped 3.4%.

Moreover, the stock carries a Zacks Rank #4 (Sell).

Factors Hurting Caterpillar

Slowdown in Industrial Production: The U.S.-China trade tensions and waning global demand has taken its toll on the U.S manufacturing sector, and Caterpillar isn’t immune to the trend. Industrial production declined 0.3% in January following a dip of 0.5% in fourth-quarter 2019. Further, the U.S Purchasing Managers’ Index (PMI) as per the Institute for Supply Management remained below 50 (indicating contraction) for five months in a row till December. Although the index has climbed to 50.9 in January followed by 50.1 in February, it remains to be seen whether this recovery will sustain considering the closures due to the coronavirus outbreak, which is spreading across the United States as well.

Coronavirus Outbreak: The World Health Organization (WHO) has officially declared the coronavirus outbreak as pandemic. The virus has spread across more than 100 countries and per WHO’s situation report as of Mar 12, 2020, the global number of coronavirus cases is at 125,048.

The impact of the outbreak on customer spending, travel restrictions, factory closures in China, disruption in global supply chains, among others, are expected to weigh on the global economy. Per the Organisation for Economic Cooperation and Development (“OECD”), the coronavirus outbreak could cut global economic growth in half and push several countries into recession. The organization projects meager growth of 2.4% in the world economy this year — the lowest rate since 2009.

Global Oil Price War: Oil prices have tumbled as Saudi Arabia initiated a price war and boosted its oil production significantly in retaliation to Russia’s refusal to lower its crude production at the OPEC meeting. Notably, oil prices were already under pressure due to the coronavirus outbreak, which led to travel restrictions and consequently impacting demand for fuel. This scenario, in turn, will impact Caterpillar’s oil and gas business.

5 Industrial Stocks That Have Better Prospects

Though Caterpillar’s prospects may not appear impressive at the moment, there are some Industrial Products stocks that hold promise despite the overall weakness in the sector.

Our proprietary methodology comes in handy while zeroing in on these stocks. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer good investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Here are five stocks that fit the bill.

Tennant Company TNC: Based in Minneapolis, MN, this company designs, manufactures, and markets floor cleaning equipment worldwide. It has a long term estimated earnings growth rate of 10%. It has a Zacks Rank #1 and a VGM Score of A. The Zacks Consensus Estimate for 2020 earnings has moved up 37% in the past 30 days, suggesting growth of 40.7% from the year-ago quarter. The company has a trailing four-quarter positive earnings surprise of 26.60%, on average.

Brady Corporation BRC: Milwaukee, WI -based Brady Corporation manufactures and supplies identification solutions and workplace safety products to identify and protect premises, products, and people in the United States and internationally. The Zacks Ranked #2 stock has a long term estimated earnings growth of 7.50%. It has a VGM Score of B. The Zacks Consensus Estimate for 2020 earnings indicates year-over-year growth of 8%. The estimates have moved up 1% over the past 30 days. The company has a trailing four-quarter positive earnings surprise of 10%, on average.

Myers Industries, Inc. MYE: This Akron, OH.-based company manufactures and sells polymer products for industrial, agricultural, automotive, commercial, and consumer markets in the United States and internationally. It has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for 2020 has gone up 2% over the past 30 days, indicating year-over-year growth of 12.8%. The company has a trailing four-quarter average positive earnings surprise of 7.5%.

Regal Beloit Corporation RBC: This Beloit, WI-based company designs, manufactures, and sells electric motors, electrical motion controls, and power generation and transmission products worldwide. It currently has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for 2020 earnings has moved up 1% in the past 30 days, indicating year-over-year growth of 6%. The company has a long-term estimated earnings growth of 10%.

Amcor Plc AMCR: Based in Zürich, Switzerland, Amcor develops, manufactures, and sells various packaging products for food, beverage, pharmaceutical, medical, home and personal care, and other consumer goods end markets worldwide. The Zacks Consensus Estimate for Amcor’s fiscal 2020 earnings has gone up 5% over the past 30 days, suggesting year-over-year growth of 3.3%. The company has a trailing four-quarter positive earnings surprise of 7.9%, on average. The stock has a Zacks Rank#2 and a VGM Score of B.

Zacks Top 10 Stocks for 2020

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Caterpillar Inc. (CAT) : Free Stock Analysis Report
 
Regal Beloit Corporation (RBC) : Free Stock Analysis Report
 
Tennant Company (TNC) : Free Stock Analysis Report
 
Brady Corporation (BRC) : Free Stock Analysis Report
 
Myers Industries, Inc. (MYE) : Free Stock Analysis Report
 
Amcor PLC (AMCR) : Free Stock Analysis Report
 
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