Posted by: Ben Steverman on October 22, 2008
Caterpillar shares are trading at a four-year low, down 13.4% in just the last five trading sessions.
Part of this is to blame on a weak earnings report on Tuesday morning. But the market is looking ahead, and, when it comes to this maker of heavy equipment, investors are scared.
Over the past year, the slowdown in the U.S. housing market and the weak U.S. economy has hurt Caterpillar somewhat. But nonetheless the stock was celebrated by some investors for its role in the much-discussed “global infrastructure boom.” Sales abroad were brisk as Caterpillar equipment was used to help build roads, bridges, oil pipelines, skyscrapers, sewer systems in both the developed and developing world.
Much of this infrastructure build-out was fueled by high commodity prices. Places like Brazil, Russia and oil-rich Middle Eastern states had billions to invest on new infrastructure.
On Wednesday, the price of a barrel of crude
For Caterpillar, this potentially knocks out the last leg propping up its business.
From the AP story on Caterpillar’s earnings report:
Jim Owens, Caterpillar’s chairman and chief executive, [said] demand in emerging markets and commodity prices that have encouraged investment in mining and energy had helped offset negative economic conditions in much of the developed world. He pointed to “recessionary conditions in North America and growing weakness in Europe and Japan.”
In other words, Caterpillar hasn’t even begun to feel the effects of a global emerging markets slowdown. If you’re an investor betting it will occur, you’ve probably already sold your Caterpillar stock.
Of course, lower commodity prices may actually help Caterpillar a bit because its raw material costs will fall. But that won’t help very much if Caterpillar sells less of its equipment.
Eli Lustgarten, a savvy analyst at Longbow Research, is seriously worried about an overall drop in demand for Caterpillar products. He wrote:
The key issue is whether the unfolding economic weakness extends into 2010, or whether a potential market upturn in developed countries occurs in time to offset any potential weakness in the large equipment demand if commodity prices/energy price weakness results in further postponement of capital projects in these areas.
I’m certainly not suggesting Caterpillar is in any serious financial trouble. This is a strong company with a solid balance sheet. But it is now clear that Caterpillar’s recent good times have come to a grinding halt.