If you're a Caterpillar or Manitowoc investor, brace for a tough time ahead. The sharp slump in oil prices may have sent energy investors scurrying for cover, but you could lose big too as an investor in either of these heavy-machinery stocks. And it could get pretty ugly. I'll tell you why.
Why Caterpillar could have a hard landing
With the mining industry in a rut and international construction markets slowing down in recent months, the onus to help Caterpillar sail through the challenging times rests on its energy and transportation business. E&T came into the spotlight after it emerged as the company's largest and most profitable division last year, contributing 40% and 54% to its total machinery sales and operating profits, respectively.
While E&T serves diverse industries, oil and gas happens to be one of its primary end markets, which is where the problem lies.
Data source: Manitowoc Presentation at Robert W. Baird Industrial Conference, November 2013. Chart by author.
Sluggish demand from the oil and gas industry has already been exerting pressure on Manitowoc's top line for some quarters now. If oil companies hold back projects, rough-terrain crane sales could screech to a halt, leaving Manitowoc in a lurch.
What's worrisome is that despite a single-digit drop in crane revenue over the nine months through September, Manitowoc's crane operating profits slumped 28% year over year, suggesting that off-road cranes are also high-margin products. In other words, soft sales for this product segment could hit the company's bottom line hard. That's not what investors want to see, especially when Manitowoc is already having a hard time keeping up with its huge debt load and low cash flows.
Risks that investors face
Between the two companies, Caterpillar could be more vulnerable to oil price fluctuations since E&T is its most important business right now in terms of profitability. Manitowoc still has a relatively stable foodservice business to fall back on. Moreover, savings at the pump as a result of low oil prices could spur consumer spending and business for restaurants. Growth at Manitowoc's foodservice business depends heavily on the health of the restaurant industry.
That said, both companies have considerable exposure to the energy sector, and neither can escape the brunt of falling oil prices. As an investor, you need to be cautious.
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The article These 2 Stocks Could Tumble as Oil Prices Fall (Surprise: They're Not Oil Stocks) originally appeared on Fool.com.
Neha Chamaria has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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