Manufacturing giant Caterpillar Inc. is trying to dig out as headwinds from slowing global markets and falling oil prices pile up. The company is forecasting flat sales for the coming year.
Shares of the Peoria-based company have been under pressure since mid-July when key overseas markets reported slower sales. At $101.30 Wednesday morning, Caterpillar stock is down 9 percent from its 52-week high of $111.4 set in July.
While manufacturers such as Caterpillar are optimistic about domestic demand, “the only worry is the continued slowing growth, and that has a lot to do with China,” said National Association of Manufacturers Chief Economist Chad Moutray, in an interview.
For decades, the mining and construction equipment maker generated substantial revenue and profit from its global operations in more than 180 countries, especially booming markets like China and the Middle East.
At the height of the boom in 2012, Caterpillar logged $66 billion in revenue and its shares set a record high of $116.20. This year, revenue is estimated to be 16 percent below its 2012 level at $55 billion.
Caterpillar owns more than two dozen facilities in China, and has partnered with major state projects, such as the construction of the Beijing 2008 Olympics stadium and the world’s largest hydroelectric dam on the Yangtze River.
China’s estimated 7.3 percent GDP growth this year, the lowest since its economy grew by 10.4 percent in 2010, negatively affects Caterpillar, along with other companies in heavy industry.
The company expects revenues to be flat or slightly up for the rest of the year and 2015, said Vice President of Strategic Services Mike DeWalt in a conference call after the company reported third-quarter earnings that were better than forecast.
China is expected to “remain challenged in the future,” according to the company’s quarterly report on Oct. 23.
Overseas demand from countries other than China, notably Europe, has also been slowing since summer.
“The fear is that Europe will once again sink back into recession,” wrote Moutray in a recent report on the global economic situation. Eurozone third-quarter GDP grew only 0.8 percent, down from its 2.8 percent peak in 2011.
Geopolitical turmoil in the Middle East may also negatively impact Caterpillar’s prospects if the situation drags on, said Kwame Webb, analyst at Morningstar.
Strength in the company’s energy drilling equipment business has been a bright spot (revenue rose 13 percent in the third quarter) helping to offset declines in construction and mining. But with oil prices recently falling sharply, below $75 a barrel to the lowest level since 2010, that strength could diminish.
In addition, the company’s Middle Eastern markets may weaken as countries that rely on oil money for infrastructure development face pressure to reduce expenditures.
In South America, demand has become softer, but analysts expect some improvement next year, according to William Blair analyst Lawrence De Maria.
These “wild cards” will impact the stock price longer term as problems linger, said Webb.
Just nine of 28 analysts who follow the company suggest buying the shares, and the rest suggest holding. The 12-month average target price is $107.80, according to Bloomberg LP. UBS and JPMorgan, among others, recently lowered their target prices.
The stock’s trailing price-to-earnings ratio is 15.97, below the 18.60 median for the industry and 17.26 for the Standard & Poor’s 500 Index. Caterpillar’s forward price-to-earnings ratio of 15.20, according to Bloomberg LP, reflects investors’ caution.
“There are so many negative things at the moment, and most of the investors are aware of that, too,” said Webb.
The management acknowledged that “significant risks and uncertainties remain that could temper growth in 2015,” but said it expects cost-cutting will help to preserve profit margins even as sales are flat.
The company’s workforce has shrunk by nearly 20,000 over the past two years, and it has spent $450 million on streamlining production this year, moves that have placated some on Wall Street.
“We remain comfortable with Caterpillar’s long-term positioning,” Webb wrote.