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Time to Give Up on Caterpillar Inc. (CAT)’s Stock?

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Between falling sales, plunging profits, and hefty job cuts, it’s easy to want to throw in the towel on the stock of mining equipment manufacturer Caterpillar Inc. (NYSE:CAT). Shares have fallen 4% this week and are down more than 16% from the highs hit earlier this year. Considering it just announced it was cutting its outlook for the second straight quarter, it’s easy to think the only thing Cat is digging is its own grave.

Caterpillar Inc. (NYSE:CAT)The hardest-hit segment was Caterpillar Inc. (NYSE:CAT)’s resource industries, which is comprised largely of its mining business, and which saw revenues plunge 34%, to $3.6 billion. It was only slightly better in the construction industries, where it experienced a 9% drop in sales. Not only has that been the trend for a while now, but it’s an industrywide problem, too, as Joy Global Inc. (NYSE:JOY) previously recorded a 23% drop in its second-quarter mining equipment business.

Both were hurt by weak demand here at home, but also from China and the rest of Asia, as well. Caterpillar Inc. (NYSE:CAT)’s monthly dealer stats give insight into just how difficult the situation has become.

Where Latin America had been Cat’s bright spot, we see that sales there are taking a turn for the worse, and while the Asia/Pacific region had been depressed, it was starting to rebound; only that has turned south, too. Not surprising, really, because China’s flash manufacturing PMI index tumbled again in July to hit an 11-month low of 47.7, and its employment index also dropped to 47.3, now the weakest its been since the depths of the global financial crisis in March 2009.

Piling on, mining companies are slashing their capital expenditure budgets. Gold miner Eldorado Gold Corp (USA) (NYSE:EGO) recently said it was cutting its capex plans by a third, Arch Coal Inc (NYSE:ACI) was “diligently” reducing its spending, and BHP Billiton Limited (ADR) (NYSE:BHP), Rio Tinto plc (ADR) (NYSE:RIO), and Vale SA (ADR) (NYSE:VALE) have jettisoned assets no longer considered core to their operations.

Furthermore, noted short-seller Jim Chanos has become bearish on Cat, saying the spending cuts we’re seeing will accelerate. With 70% of Caterpillar Inc. (NYSE:CAT)’s revenues derived from outside the U.S., and almost two-thirds in mining and construction, this could be seen as a very troubling development.

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