Caterpillar keeps falling

Caterpillar will announce its third-quarter figures on 22 October, and the commodity market slump is causing pain for the heavy-machinery manufacturer. 

A Caterpillar vehicle
Source: Bloomberg

There is no stopping the decline in Caterpillar's shares, and despite cutbacks the company will have to diversify further into the construction sector in order to shield itself from the mining sector fallout.

The collapse in the commodity market has prompted mineral extractors to curtail their capital expenditure, and this is hammering Caterpillar’s profitability. Should metal and energy prices remain weak we could see more cuts, which in turn would severely hurt the equipment manufacturer.

The US housing market remains strong and is being aided by the Fed’s ultra-low interest rates, but the additional sales to the building industry won’t make up for falling revenue from the commodity space.

As I previously stated, this will be a challenging year for Caterpillar, and at the moment the outlook for 2016 is looking much better.

In the second-quarter EPS fell by 24% and revenue dropped by 13%. n an effort to keep shareholders sweet the company revealed a $1.5 billion share buyback scheme. This follows the 2014 buyback which was worth $4.2 billion. The scheme was aimed at using cash effectively as there is no point in expanding the business while the sector is in a downturn, but the share price still slid over that period.

In September, the company announced plans to cut up to 10,000 jobs by 2018, however this didn’t stop the wave of selling.

When Caterpillar announces its third-quarter numbers, the market is anticipating revenue of $11.4 billion and EPS of 79 cents. In the second-quarter the company had revenue of $12.31 billion and EPS of $1.27.

The company will report its full-year figures in January 2016, with dealers expecting revenue of $48.2 billion and EPS of $4.65, which equates to a 12.5% drop in revenue and a 27% fall in EPS.

Investment banks are bullish on Caterpillar, and out of the 29 ratings, five are buys, 20 are holds, and four are sells. The average target price is $70, which is marginally higher that the current price.

The number of short positions on Caterpillar has increased by 44% since the second-quarter figures were announced.

Caterpillar shares have been falling since June 2014 and $63 is the initial target. A move below that level will bring the $58 region into play. The stock has been rising since September and $72 will act as resistance. 

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