Caterpillar Downgraded To Strong Sell

On Oct 26, 2013, Zacks Investment Research downgraded Caterpillar Inc. (CAT) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Caterpillar witnessed sharp downward estimate revisions after reporting disappointing third-quarter 2012 results on Oct 23. Reduced mining demand continued to plague the construction and mining equipment behemoth; resulting in an 18% year-over-year decline in revenues to $13.4 billion while earnings per share slumped 43% to $1.45.

Caterpillar has delivered negative earnings surprises in all the past four quarters. Caterpillar has trimmed its fiscal 2013 guidance for three quarters in a row. For fiscal 2013, Caterpillar now projects sales of $55 billion, down from the previous range of $56 to $58 billion due to lower sales expectations for Resource Industries (down 40%) and Power Systems and Construction Industries (each down 5%).

Caterpillar now expects to earn $5.50 per share in 2013, down from the earlier projection of earnings of $6.50 per share due to lower sales volume including an unfavorable mix of products and lower price realization. The Zacks Consensus Estimate pegs 2013 earnings at $5.53 a share, reflecting a 35.91% year-over-year decline.

Caterpillar expects revenues in 2014 to be flat with 2013 or move up or down in a 5% range. Construction Industries is expected to log sales growth, Power Systems sales will be flat, while sales in Resource Industries is expected to dip. The Zacks Consensus Estimate for 2013 projects a year-over-year decline of 9.81%.

Estimate revision trend reflects overly bearish sentiment toward Caterpillar’s earnings for the ongoing as well as next year. For 2013, 11 of the 15 estimates were revised downward over the past 7 days, dragging down the Zacks Consensus Estimate by 11% to $5.53 per share. For 2014, 14 of the 18 estimates were revised downward over the same timeframe, lowering the Zacks Consensus Estimate by 14% to $6.07 per share.

Other Stocks to Consider

Not all stocks in the industrial products sector are performing as poorly as Caterpillar. We recommend Lonking Holdings Ltd. (LONKF), AGCO Corp. (AGCO) and IDEX Corp. (IEX), all carrying Zacks Rank #2 (Buy).

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