Markets

Crush Caterpillar Woes with This Industrial ETF

The global commodity rout has been hammering the mining sector badly for long as the companies in this sector were sliced by budget cuts, reduced spending and withheld projects. This is primarily thanks to plunging prices for raw materials such as crude oil, copper, coal and iron ore amid the global supply glut and persistent slowdown in China.

The woes intensified after the bellwether for the industrial sector Caterpillar ( CAT ) provided a sluggish outlook and restructuring plans on September 24. The news dampened investors' mood making them cautious on not only the stock but also on the broad mining and industrial sector.

What Happened?

The mining and construction giant lowered its revenue forecast for this year and the next, citing prolonged weakness in the industrial sector and two key regions - mining and energy. It now expects revenues to come a billion dollar lower than the previous expectation at $48 billion in 2015 and to decline 5% year over year in 2016. This marks the second reduction in guidance in two months (see: all the Industrials ETFs here ).

If there is any truth in the prediction of declining revenues next year, 2016 would be the third consecutive year in the company's 90-year history to see revenues decreasing for four consecutive years.

In order to make up for lost revenues, the company announced a cost-restructuring plan that could save $1.5 billion a year upon full implementation. For this, it would cut as many as 10,000 jobs (9% of workforce) over the next three years with 4,000-5,000 job cuts expected by the end of 2016. Other initiatives include introduction of a "voluntary retirement enhancement program" for qualifying employees by the end of this year, lower selling, general and administrative costs, facility consolidations and closures that could impact more than 20 facilities and slightly more than 10% of Caterpillar's manufacturing square footage.

Shares Slumping and Estimate Revisions Sinking

Caterpillar has been one of the worst performing stocks of the Dow 30 this year, falling 29% compared with an 8.5% decline for Dow Jones. Following the reduction in the sales outlook and the cost reduction plans, shares of CAT dived over 6% on Thursday to touch a five-year low of $65.80 (read: 4 Worst Performing U.S. Equity ETFs So Far in 2015 ).

The company has seen a negative earnings estimate revision of 3.2% over the past one week and 4.6% over the past three months to $4.78 for 2015. For 2016, the Zacks Consensus Estimate is currently pegged at $4.43, down 2.8% over the past week and 7.9% over the past three months. At this level, earnings are expected to decline 25.1% year over year for this year and 7.4% for the next. This compares with the industry average of 12.7% decline for 2015 and 5% growth for 2016. If this wasn't enough, the company saw an average negative earnings surprise of 9.71% over the past four quarters.

All these suggest that more pain in store for this machinery giant in the coming months, compelling investors to move away from the stock at present. The stock currently has a Zacks Rank #3 (Hold) and has a poor Zacks Industry Rank (in the bottom 6%).

How to Play?

Luckily, investors seeking to tap the beaten down industrial sector but wanting to avoid CAT could consider First Trust RBA American Industrial Renaissance ETF ( AIRR ) that has no exposure to this machinery giant. The fund currently has a Zacks ETF Rank of 3 or 'Hold' rating with a High risk outlook (read: Invest in America with These 4 ETFs ).

AIRR in Focus

This fund provides exposure to the small and mid cap stocks in the industrial and community banking sectors by tracking the Richard Bernstein Advisors American Industrial Renaissance Index. The index first eliminates the stocks from the Russell 2500 Index that aren't connected to manufacturing or related infrastructure, and banking. Then it eliminates the companies with non-U.S. sales greater than or equal to 25% and for positive 12-month forward earnings estimates. For the banking component, only banks in traditional manufacturing hubs will be included in the holdings list.

The approach results in a basket of 42 securities, which are widely spread out across components with none holding more than 4.21% of assets. The fund is often overlooked by investors as depicted by its AUM of $45.2 million and average daily volume of about 19,000 shares. It charges 70 bps in fees per year and has lost 15.7% so far this year.

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FT-RBA AMER IND (AIRR): ETF Research Reports

CATERPILLAR INC (CAT): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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