Caterpillar Digs the Dow a Hole on Monday

Caterpillar

When Caterpillar misses its earnings projections by as much as they did today, hearing $2.55 per share and expecting $2.98 per share, investors are going to be concerned.

Disappointing earnings announcements from Dow component Caterpillar helped drive the DJIA lower on Monday, although markets did recover a fair bit before the end of trading.

Caterpillar is viewed as a real bellwether company and stock and is closely watched by many to get a feel of where overall business conditions and stock market sentiment may be headed, and we were eagerly looking forward to getting their results in Q4.

The consensus number among analysts for the quarter was $2.98 a share, and keeping up with this forecast and especially exceeding expectations would have been seen as a real vote of confidence for the market’s 2019 surge. Falling short, on the other hand, risked elevating concerns about not just the company, but the market as a whole, and the greater the discrepancy, the greater the concern.

Caterpillar is an interesting company in particular due to its close ties with the construction industry, and positive results for them tend to indicate that we are building more, and therefore is indicative of economic growth in general.

The results are in for the heavy equipment manufacturer, where earnings per share after adjustments only coming in at $2.55, well short of predictions.

Caterpillar opened down 7.62%, and traded mostly flat throughout the session and ended even lower, at –9.13%. The Dow ended up down 0.84%, but almost half of this loss was due to the plunge in Caterpillar’s stock.

The Dow was down twice that at one point, around noon, but did recover to keep its losses pretty reasonable under the conditions. We can take some real positives from this as if we were on course for a real down day and not just less than a percentage point, this would have been the time we’d see some piling on, as we saw during some down days in the fourth quarter tumble it took in 2018.

The Market Response Can Be Seen as Somewhat Positive

Instead, investors ended up seeing this drop as an opportunity and used it to add to positions, showing us that market confidence is still pretty good. After the bell, in after-market trading, we’ve seen it give back half of this 200-point comeback, although we’ll know more about where we’re headed as the overnight trading unfolds and the normal market trading has its say once markets re-open in the morning.

Opening lower, going even lower, and ending even lower is the hallmark of a true bearish day in the markets, and seeing things start out going down for the first third of the day and rebounding during the rest of the say may even be seen as somewhat encouraging.

Caterpillar attributes this disappointment to reduced demand from China, causing their orders on the books to drop by $800 million. Declining demand from China due to their economy cooling off from red-hot to just hot is driving down the earnings and profit of many other companies.

This is more a matter of our needing to adjust our expectations though rather than putting companies like Caterpillar in real trouble, and if we aren’t accounting for their shrinking growth rates enough, this is what will happen. The relative slowdown of Chinese growth, if we can even call 6.5% a year slow, is weighing heavily on some companies in particular, and Caterpillar, being such an industry leader, is particularly taking this on the chin.

It’s not so much what has happened to Caterpillar’s business, it’s where it is headed, and the worry is that this will continue. This stock is so closely weighed that Eric Schiller of venture capital firm The Patriarch Organization has gone as far as to say that Caterpillar’s declining business “screams of a recession.”

Recessions Are Hard to Come by Though

It might not be screaming recession but it might be whispering about one, even though it does take quite a bit to go from the solid growth that we still see the negative growth that defines recessions. While we’re hearing some predict that U.S. growth will slow from around 3% to 2.3% in 2019 and 2% in 2020, that’s still quite a way away from a negative number.

China still props up global growth these days with their 6.5%, and it would take even more to get to the point where worldwide economic growth would see its positive numbers erased entirely. Certainly, trade tensions between the U.S. and China, including the impact of tariffs, is weighing pretty heavily on things, but we do need to maintain perspective here when we speak of more dire predictions such as a recession which do not appear to be substantiated at present.

Caterpillar CEO Jim Umpleby told us that he still expects a “modest sales increase based upon the fundamentals of our diverse end markets as well as the macroeconomic and geopolitical environment.” The outlook of a modest sales increase is hopeful, and although the macro environment may be moving in the wrong direction a bit anyway, there’s little to tell us that we’re in for as rough of a ride as some believe.

Schiffer predicts, and perhaps not without cause, that “Caterpillar’s profits will be further pummeled in 2019 because of a synchronized slowdown in global growth, and the trade tariffs continuing to bury sales in Asia.”

We therefore have two distinct views of the “macroeconomic and geopolitical environment,” with Umpleby citing this as a positive to some degree and Schiffer seeing this as what is weighing the company down. What actually happens may lie somewhere in the middle, depending on how this all turns out during the coming year.

There is at least some hope that trade relations between the U.S. and China will improve in 2019, which would have a positive impact upon Caterpillar’s profits. China also needs to try to address their own declining results, and they just announced that things are continuing to move the wrong way for them. If China decides to try to spend to turn things around, this could have a real impact and the possibility of this of course needs to be accounted for as well.