Photograph by JG León Zambrano
turns out okay with Tuesday's call
Revenue from (CAT: CAT) is expected to peak this year, many other companies could also be on the line of fire.
A decline in profits at the heavy equipment manufacturer in 2020 would indicate difficult times in similar industries. Holders of construction-related actions may feel the most pain.
The history of return : Investors worry about the state of economic demand in recent months. The US manufacturing sector continues to grow at a brisk pace, although slower, but industrial activity in key economies such as Germany, Japan and China is contracting.
This dynamic has lowered the valuations of industrial stocks. The industrial components of the
S & P 500
trade for about 16 times the estimated profit in 2019. This is a reduction in the wider market and a reduction of 10% on their historical average.
What's up: UBS Analyst Steven Fisher Tuesday downgraded from buying to selling, claiming that Caterpillar's results would rise to 2019. Much of the difficulty will come in the construction and energy markets, Fisher says.
"We expect growth of about 4% of turnover in the construction sector in 2019, then a decline of about 8% in 2020," he wrote.
During a recent conference call, Caterpillar chairman Jim Umpleby said the company was expecting an increase in demand for construction products in 2019. Volatility in oil prices and bottlenecks Strangling pipelines in the Permian Basin are expected to weigh on demand for energy commodities early in the year, but natural gas and power generation markets are expected to remain strong.
He did not address the growth of 2020. A spokesman for the company made no further comments.
Go from the front: Difficult times in construction and in the oil sector would cause problems for other companies that sell in the construction and energy sectors. Energy service stocks have already misunderstood it, a sign of a likely weakness in the demand for equipment from these companies. the
Philadelphia Petroleum Services Index
(OSX) is down 45% from its peak of 52 weeks because oil prices have dropped from about $ 55 a barrel to about $ 75.
It is construction-related inventories that could suffer more if construction activity slows, as Fisher predicts.
The housing market is already headed south. The US housing churn rate – a measure of market activity that combines new housing starts with existing home sales – was down 8% from December.
Shares (HD) fell 2% after the company announced disappointing results on Tuesday.
However, commercial construction in the United States has not decreased. It grows at an annual rate of 4% to 5%, according to the Census Bureau. If this rate slows, companies like
(TEX), manufacturer of cranes; equipment rental companies such as
(URI); and even suppliers of building materials like
(VMC) would be affected.
Like energy service inventories, inventories of homebuilders have been defeated. They trade for less than 10 times their profits and are down 18% from their 52-week highs.
Inventories in construction product companies performed better. The Russell 3000 Building Materials Index is 16 times higher than the estimated profit for 2019 and up 18% since the beginning of the year. Declining construction results could compromise the valuations of these companies.
Calling a pick in construction is a big problem. Commercial construction spending in the United States has increased about 9% per year since the depths of the financial crisis. A recession in the construction sector would only slow down more than Caterpillar.
Write to Al Root at email@example.com