Following the wake of its recent downbeat forecast and layoff plans, heavy equipment manufacturer Caterpillar (NYSE:CAT) has received an analyst downgrade from the securities analysis arm of the firm William Blair. The downgrade shifts forecasts for Caterpillar from Outperform to Market Perform. The firm stated that Caterpillar has ‘too many headwinds to ignore’ including locomotive equipment in North America, gas, oil, and other commodity-related investments, as well as exposure to weak trends in emerging markets such as China and Brazil. More troubling, the firm expects such obstacles to revenue strength to persist to next year.
What makes the downgrade interesting (since global markets have already recognized the weakening China export-driven market’s impact on global commodity prices and commodity related players like equipment manufacturers) is the firm’s perceived weakness in the US market for energy extraction. Energy extraction at oil and shale gas fields figure prominently in Caterpillar’s overall revenue profile. Considering the continuing weakness in global oil prices and the downward pressure on shale oil field production, this readily translates to weakening demand for heavy equipment in the energy and related industries in the US.
According to its analyst report, William Blair doesn’t see any offsetting factor that would temper downward pressure on the demand for heavy equipment. Outside a significant uptick in total global economy activity, the firm sees the negative trends it outlined continuing to operate against players in Caterpillar’s industry for the near term future. Considering possible other analyst downgrades for energy-related industry players in the future, it might be a good idea to hold off on loading up on Caterpillar and other heavy equipment manufacturer stock in the short-term. On the flipside, the coming months might bring interesting buying opportunities for such stocks.