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Dump Caterpillar and 3 Peers on Looming China Fears

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China's stock market rout and the disappointing manufacturing data have sucked the mining machinery industry into its vortex. The industry has been hit hard with miners cutting down on expenditure in the wake of commodities hitting their multi-year lows.

China accounts for approximately one half of the demand for the world's metals. The slowest pace of economic growth in 25 years in China has dragged the metals market along with it. China is expected to post its weakest economic growth since the global financial crisis in the fourth quarter. A renewed plunge in China's stock markets and weak factory and service data stoked concerns among global investors about the health of the world's second-biggest economy.

The threat of oversupply looms large on the mining machinery industry as inventory continues to pile up, while the once frenzied demand in China has fizzled out. Metal prices will remain depressed until the supply glut is eased by production cuts.

Moreover, the interest rate hike gave a boost to the dollar, which makes dollar-denominated commodities like metals expensive, bringing them lower. Additionally, geopolitical tensions, especially in the Middle East, along with the currency war initiated by China, could lead to a stronger U.S. dollar in 2016. This could lead to more weakness in metal prices.

Caterpillar: A Tale of Woe

The plight of the mining machinery industry is evident from the recent dismal performance ofthe world's largest maker of mining and construction equipment, Caterpillar Inc. CAT . The company's performance has lately borne the brunt of a weak mining industry, low oil prices , stronger U.S. dollar and China's economic woes.

Caterpillar's monthly sales growth rate has been in negative territory for the past 36 months. This is worse than the company's previous nightmarish 19-month stretch of declining sales due to the global recession.

Caterpillar is expected to report fourth quarter results on Jan 28, 2016. For 2015, the company projects revenues of $48 billion and earnings per share of $4.60. This depicts a 13% drop in revenues and a 28% plunge in earnings, both on a year-over-year basis. In case Caterpillar's sales decline next year, true to its guidance of a 5% decline, the company's revenues would dip for four consecutive years for the first time in its history of 90 years.

Caterpillar's competitor, Joy Global Inc. JOY , has also been hit hard by weak demand in the global mining market. In December, the company reported an unceremonious 67% plunge in its adjusted fourth-quarter earnings. In fiscal 2015, new bookings slumped 25% year over year to $2.7 billion and backlog at the end the fiscal was down 34.3% year over year.

Joy Global expects fiscal 2016 revenues in the range of $2.4 billion to $2.6 billion and earnings per share in the band of 10 cents to 50 cents. This is a marked slowdown from revenues of $3.2 billion and earnings per share of $1.95 in fiscal 2015.

The bearish phase of the mining market has dealt a blow to Caterpillar's long-term objective of becoming a dominant global player in the mining space. Previously, Caterpillar had been riding a wave of heightened construction and mining activity in developing markets, triggered by the demand for coal, copper and iron ore.

In an attempt to be a leader among the global mining original equipment manufacturers, the company acquired Bucyrus in 2011 for $8.8 billion. The buyout resulted in the most expansive product offering in the mining equipment industry. However, the slowdown in China put an abrupt end to its mining dream.

Shares of Caterpillar plunged to a 52-week low of $60.39 yesterday. Caterpillar currently carries a Zacks Rank #4 and has lost 12.34% in the past one week. Since the start of the year the company's shares have lost 9.26%. The Zacks Consensus Estimate for 2015 and 2016 has moved south 1% and 10%, respectively, over the past 90 days. The company has a negative earnings growth estimate of 27.97% for 2015 and a projected decline of 23.80% for 2016.

Given the fact that Caterpillar is often considered a bellwether of economic activities, its dreary performance sends out a red signal for the mining industry as well as other industries dependant on it. The Machinery-Construction/mining industry currently has a Zacks Rank of #224, indicating a negative outlook.

We rank the 257 industries in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. This ranking is available on the Zacks Industry Rank page .

The way to align the ranking and outlook from the complete list of Zacks Industry Rank for the 257+ companies is that the outlook for the top one-third of the list (Zacks Industry Rank of #86 and lower) is positive, the middle one-third (Zacks Industry Rank between #87 and #173) is neutral, while the outlook for the bottom one-third (Zacks Industry Rank #174 and higher) is negative.

Along with Caterpillar, we have short-listed three other stocks from the mining machinery industry to steer clear of at the moment. We have screened stocks that have a Zacks Rank #4 (Sell) and Rank #5 (Strong Sell) that have witnessed downward estimate revisions over the past few months. Moreover, they are lounging near their 52-week lows and have delivered miserable losses on the bourses.

Joy Global

Headquartered in Milwaukee, Joy Global manufactures and services mining equipment for extraction of coal, copper, iron ore, oil sands, gold, and other minerals and ores worldwide.

Joy Global currently carries a Zacks Rank #5 and touched a 52-week low of $8.71 on Jan 13. Joy Global shares have lost 44.57% of their value in the past 12 weeks and delivered a year-to-date return of negative 27.91%. The stock has failed to match the Zacks Consensus Estimate in two of the past four quarters, with an average negative earnings surprise of 8.64%.

Moreover, estimates of this company have undergone substantial negative revisions in the past 90 days with the fiscal 2016 estimate going down 79% and fiscal 2017 following suit by 58%. The company's earnings are expected to decline 86% in fiscal 2016.

The Manitowoc Company, Inc.MTW

Based in Manitowoc, WI, The Manitowoc Company, Inc. designs, manufactures, and sells cranes and related products, and foodservice equipment worldwide.

Shares of Manitowoc plunged to its 52-week low of $13.26 yesterday. This Zacks Rank #4 stock has lost 6.84% in the past 12 weeks and 10.36% in the year-to-date timeframe. The Zacks Consensus Estimate has moved south over the past 90 days by 28% for 2015 and 24% for 2016. The stock has delivered an average negative earnings surprise of 4.07% in the past four quarters. The company's earnings are expected to decline 59.56% in 2015.

Terex CorporationTEX

Based in Westport, CT, Terex Corporation is a global equipment manufacturer catering to the construction, infrastructure, and surface mining industries. The company's manufacturing facilities are located in the U.S., Canada, Europe, Australia, Asia and South America.

This Zacks Rank #4 stock has failed to match the Zacks Consensus Estimate in two of the last four quarters, with an average miss of 26.21%. Moreover, estimates have been revised downward over the past 90 days with the 2015 estimate going down 4% and 2016 estimate plunging 12%. To top this, Terex's fiscal 2015 earnings are projected to decline 23.2% year over year. Terex had fallen to its 52-week low of $15.68 on Jan 12. The stock has a negative year-to-date return of 11.15% and has lost 14.83% of its value in the past 12 weeks.

Bottom Line

Exiting certain underperformers at the right time helps to maximize portfolio returns. With a bleak outlook for the mining machinery industry, we believe it will be a prudent move to get rid of these stocks at the moment.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

TEREX CORP (TEX): Free Stock Analysis Report

CATERPILLAR INC (CAT): Free Stock Analysis Report

MANITOWOC INC (MTW): Free Stock Analysis Report

JOY GLOBAL INC (JOY): 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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