Will Heavy Industry Stocks Follow Caterpillar's Downfall?
Linear connections exist so rarely in the world of economics that investment advisors and Nobel laureates alike relish the opportunity to point out places where it's possible to draw a straight line from A to B instead of needing to meander around the general equilibrium theory. The Great Commodity Collapse of 2014 (still ongoing) has impacted everything from gold to oil, but has boosted the stock market as investors look for alternatives to physical goods. The exception to this flow, and the case of a rare linear connection, has been the performance of heavy industry stocks that depend on customers in mining and manufacturing. Caterpillar, the world's largest heavy equipment manufacturer, has positively taken it on the chin within the past thirty-six months, including a 30% drop in value during 2015 alone. The company made further headwaves into negative territory by announcing to their shareholders that their 2016 revenue would drop by 5% at the same time that they would lay off nearly ten percent of their total workforce. Are their competitors succeeding where Caterpillar stock (CAT on the NYSE, trading for $70.17 a share) has failed, or is the entire industry mired in the dumps?
You can take a simple look at the 52-week highs and lows of Joy Global stock (JOY on the NASDAQ, trading for $16.94 a share) in order to get a good understanding of how dire their operations have become since the commodity peak. Joy, one of the largest mining equipment manufacturers in the world, traded for over fifty dollars just last Halloween and now sits at about a third of that figure. The dismal performance of coal has hit the company particularly hard on account of thermal coal dropping by about half its value since 2011, as Joy relies on coal mining for over half of all total sales. Second-place copper mining equipment has done little better, as the price of copper has dropped from $4.50 per pound in 2011 to $2.50 today. With 31% losses on the books year-over-year in addition to a revenue downgrade of half a billion dollars for 2015, there's no question that investors have shied away from Joy like a burning building. Theirs remains an unappealing stock for growth. Short-selling Joy Global stock represents a low-risk option for any portfolio, but requires finding another party to hold the other end of the rope.
Named for the lakeside Wisconsin community from which the founders hailed, The Manitowoc Company has been a staple of the construction business for the entirety of the 20th century. During World War II, the government contracted Manitowoc to build two dozen submarines, representing nearly fifteen percent of the total underwater fleet. They turned to manufacturing cranes and construction equipment following WWII, with a brand that became one of the most popular for building projects both domestic and international. Manitowoc did quite well during the Chinese construction boom, as over fifty percent of their crane sales come from outside North America. As China turns from a bull into a bear, the company's crane output has fallen into double-digit percentage losses year-over-year. Yet while Manitowoc's stock price (MTW on the NYSE, trading for $16.83 a share) has fallen by quite a bit since 2014, it's created a strong value buy that has had a month of solid gains on the back of their secondary revenue from food market equipment. At the same time that construction begins to slow down, the restaurant business has seen a major boom across the United States as one of the fastest-growing industries, growing by 3.6% in the past year while tacking on tens of thousands of jobs per month. That makes Manitowoc an interesting sell: their primary industry is slumping, but changing the business plan to accommodate their secondary industry gives good growth potential for those interested in moderate-risk stocks.
The engines that power everything from lawnmowers to semi-trucks filled to the brim with lawnmowers, Cummins has had about as bad a 2015 calendar year as any of the other companies on this list. Unlike any of the other companies on this list, Cummins (CMI on the NYSE, trading for $109.98 a share) has a much better grip on the domestic market than they do on the global market, with two out of every three dollars coming in from the United States and Canada. With just 6% of their sales coming out of China, they've been better suited to weather the storm. In a bullish auto market, furthermore, the two-thirds of their operations in light-, medium-, and heavy-duty automotive parts appear to be a solid foundation to build a business plan upon. Yet good hasn't been good enough: despite the strong auto sales in the US overall, Cummins engine segment sales have improved by only a paltry few percentage points. Their forecasts for 2016 call for only 2% growth in the engine market overall, which could leave them without a solid foot to stand upon. Yet their P/E ratio of 11.5 is far, far better than the competition, meaning that the company will make more money -- they just won't make it very fast. They're a better bet for a portfolio that could use long-term gains with minimal risk, or as a hedge against a higher-variance stock when investors want to swing for the fences.
- The Takeaway: it's not a particularly attractive time for heavy industry stocks. Anyone who holds Caterpillar may want to consider getting out, even if it means selling lower than expected, in order to avoid the shortfalls to come. Likewise, short-selling Caterpillar for six to twelve months looks like the surest bet you can make outside of a crooked roulette wheel. Some of the competition looks more amenable: Cummins for growth and Manitowac for value in particular have a fair amount to offer investors.
- When will the heavy industry market pick back up again? The passage of a new infrastructure bill by Congress could be a huge boost, while a deal in the Eurozone to ease debt loads would also stimulate growth. Both, however, sit at least six months out, and neither appear more likely than a coin flip at the moment.