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2 Alarming Reasons Caterpillar Stock Tumbled 11.1% in January

What happened

Caterpillar (NYSE: CAT) stock's solid rally in the last quarter of 2019 had rekindled investor hopes of a long-awaited recovery in the company's prospects. The month of January, unfortunately, dashed hopes as shares of the heavy-equipment manufacturer slumped 11.1%, according to data from S&P Global Market Intelligence.

As if mounting concerns in China weren't enough, Caterpillar released a subdued outlook for 2020 on Jan. 31, fueling fears that the company may not be out of the woods just yet.

So what

Caterpillar's revenue fell 8% year over year in the fourth quarter and 2% in 2019 to $53.8 billion, and management projects sales will decline further in 2020. "We expect continued global economic uncertainty to pressure sales to users in 2020 and cause dealers to further reduce inventories," said CEO Jim Umpleby during the company's Q4 earnings release.

Caterpillar is a hugely diversified company with a wide global presence, which is why its struggle for growth has been somewhat confusing. In its construction equipment business, for example, Caterpillar expects sales from China to be flat to down 5%, and sales from Europe, Africa, and the Middle East to be flat to "slightly up" at best in 2020. Expectations from its resource industries segment, which primarily manufactures mining equipment, is equally muted as mining companies across the globe have kept the purse strings tight on capital spending. Resource industries was Caterpillar's weakest segment in Q4, with total sales declining 14% year over year.

Image source: Getty Images.

Volatility in commodity prices, in fact, proved to be the biggest challenge for not just mining, but also oil and gas producers in 2019 -- it hit energy stocks hard. Caterpillar expects the trend to continue, which is why it expects lower demand from its energy and transportation segment in 2020.

To make matters worse, the recent coronavirus outbreak in China is an added concern as China is an important growth market for Caterpillar. That explains why Caterpillar shares started showing signs of weakness last month, days before the company reported its earnings and outlook on Jan. 31.

In short, Caterpillar is facing several headwinds, most of which are macro factors beyond the company's control.

Now what

I don't see how 2020 could be any better for Caterpillar than last year given the situation in China. Peer Cummins (NYSE: CMI) just confirmed some of Caterpillar's fears, including declining demand for construction equipment in the nation. During Cummins' Q4 earnings conference call, CEO Tom Linebarger also highlighted the threat coronavirus poses. "It is expected that our industry as well as others will experience supply chain disruptions and loss of revenues in the first quarter due to the coronavirus outbreak," he said.

Caterpillar's adjusted earnings projection of $8.50 to $10 per share for 2020 already translates into a good 10% drop at the higher end of the range. With operations and sales in China bound to take a hit due to the coronavirus, management may have to take the difficult step no investor wants to see: that of downgrading its guidance for 2020 in the coming quarters. That's not far-fetched unless end markets gather steam. The only redeeming factor? Caterpillar's dividend should continue to grow.

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Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool recommends Cummins. The Motley Fool has a disclosure policy.


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