Caterpillar; it’s no butterfly

Struggling commodity companies and collapsing oil prices are squeezing demand lower for Caterpillar products.

Caterpillar logo
Source: Bloomberg

On Tuesday 27 January Caterpillar is due to report fourth-quarter figures. Adjusted earnings per share are expected to fall from $1.72 down to $1.548. Sales are due to improve from $13.549 billion up to $14.181 billion. However, better sales are not expected to be enough to prevent the company’s pre-tax profits from dropping to $1.283 billion from $1.381 billion.

As 2014 has progressed, the business environment for Caterpillar has become increasingly difficult and this is reflected in the institutional analysis of the business. The firm currently has nine buy recommendations, 18 hold recommendations and two sell recommendations. The average twelve-month price target for the company is $98.14, and with the shares currently trading at $85.45 this offers a 14.85% upside.

Two major headwinds face Caterpillar in the years ahead. Firstly the slowing growth out of Asia, specifically China, is hampering the company’s outlook, as the outrageous growth of yesteryear is no longer likely to be in place. The second issue is the collapse in oil prices and the knock-on effect this has had on industrial equipment demand from energy-producing companies.

Having traded at $112 less than six months ago, Caterpillar has already had a fall from grace, but the economic picture is less than convincing and the sector the company operates in is going to become increasingly competitive as demand for industrial equipment struggles to revive. Although the buyers have come back in twice on recent dips below $84, this commitment could well be tested over the year.

IG offers extended trading hours on over 30 key US stocks, including Caterpillar, until 1am Mon-Thurs and 10pm Fri (London time).

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.