There is no doubt that Caterpillar (CAT, Financial) has been one of the big value creators in the past, and I like the company for its business and fundamentals. However, my view is that investors need to avoid Caterpillar in 2015. The reason is not intrinsic to the company, but due to global economic factors. This article discusses the main reasons to avoid Caterpillar in 2015.
The first factor and the biggest factor to avoid Caterpillar is China. The country’s growth has slowed down and is likely to remain weak in 2015. China’s PMI has contracted and this is an indication of the weak growth in the country. With natural resources industry being one of the biggest growth drivers for Caterpillar, I believe that the company’s growth will also remain muted or flat in 2015.
Besides the slowdown in China, the global economy is also showing signs of slowdown and a potential recession in the Euro-zone in 2015 is also likely to impact the company’s growth prospects. I must also add here that decline in oil prices might be positive when it comes to lowering inflation. However, lower oil prices can be a pain for Caterpillar as the company has also gained from the U.S. shale boom.
Therefore, there are multiple factors at play in 2015 that can be negative for Caterpillar. The uncertain global economic scenario has already impacted the company in 2014 and this negativity is likely to continue in 2015.
I have to mention here that Caterpillar’s stock price is doing the talking already in 2014. From a high of $111.4 in July 2014, the stock has declined to current levels of $91.71. It is important to note that the company’s stock decline in the second half of 2014 has been associated with a decline in oil prices and this underscores my point that lower oil price is also a negative factor for Caterpillar.
Caterpillar’s 2014YTD retail statistics also provide some insights into the company’s sales performance in terms of regions. In the Asia Pacific region, the company’s sales have been consistently lower. Sales have also been on a decline in Latin America and the decline in sales has accelerated in the recent past. In Mid-2014, sales were robust in North America due to the shale boom and the growth trajectory seems to de on a decline in the last few months. All this data confirm that the company’s overall sales growth remains very sluggish and Caterpillar can witness flat to negative sales growth in the coming year.
Among the positive points, I want to mention that Caterpillar provides a dividend payout of $2.8 per share and this translates into a healthy dividend yield of 3.0% considering the current stock price of $91.71. However, if the stock moves lower in 2015, the dividend is not enough to offset the decline in stock price due to lower growth. My view therefore is that investors need to stay in the sidelines for a better entry opportunity that will come in 2015. I remain positive on the long-term outlook for the company, but my opinion is to wait for more attractive levels.
I also want to mention the comment below from the company’s 3Q14 report:
Despite cautious optimism for improved global economic growth, significant risks and uncertainties remain that could temper growth in 2015. Political conflicts and social unrest continue to disrupt economic activity in several regions, in particular, the Commonwealth of Independent States, Africa and the Middle East. The Chinese government’s push for structural reform is slowing growth, and the ongoing uncertainty around the direction and timing of U.S. fiscal and monetary policy actions may temper business confidence. As a result, our preliminary outlook for 2015 expects sales and revenues to be flat to slightly up from 2014.
During 3Q14, the economic outlook was much better globally than it is today and during 3Q14; geo-political tensions were also relatively lower. Therefore, the overall outlook, when the management provides the next view, will be much more bearish than this view.
In conclusion, I recommend that investors stay away from Caterpillar in 2015. If the stock corrects significantly, there will be value buying opportunities. Investors need to wait for those opportunities. From a 3-5 year investment horizon, I remain bullish on Caterpillar and investors can use 2015 correction as a potential long-term investment opportunity.
