Caterpillar Inc. (CAT): A Few Things That Could Hurt Its Stock Going Forward

Internally weak

What’s worrisome is that Caterpillar’s inventory situation worsened in the first quarter — In contrast to the 18% fall in its revenue, Caterpillar’s inventory reduced by a meager 3%, both sequentially. Cat’s inventory outstanding for the quarter was at a whopping 143 days, which means Cat’s equipment are lying around in the warehouses for nearly four and a half months before getting sold. Caterpillar is having a really hard time moving its inventory. Naturally, scaling back production is the only option left until demand picks.

Lower production and sales are bound to hurt Caterpillar’s bottom line, making it difficult for the company to improve its cash flows, which presents a dismal picture currently. For record profits of $5.7 billion earned last year, Caterpillar generated a measly $165 million in free cash flow. This is another yellow flag for the company, something investors should keep in mind. Comparatively, Joy Global Inc. (NYSE:JOY) generated $305 million as FCF on net income of $762 million for the trailing twelve months.

The mining malaise

The markets are pinning hopes on the recovery of the U.S. construction market, but as long as the mining industry is in doldrums, Caterpillar’s growth will be limited for two reasons. One, its resources industries segment, which is essentially mining, is where it earned higher profits. Two, mining is also where Caterpillar Inc. (NYSE:CAT) made huge investments in recent times.

In fact, the persistent weakness in mining markets also puts a question mark to Caterpillar’s Bucyrus acquisition, which was also its largest-ever deal. Caterpillar is yet to see the kind of gains it would have expected from the acquisition. Given the way mining majors are thinking right now, it could take a lot of time. Cat expects mining equipment sales to fall 50% this year.

The Foolish bottom line

Investors should ideally not expect great profits or good returns from Caterpillar in the near future. Those who cannot handle short-term volatility should particularly stay away. That’s not to say that those who hold the stock should panic. While it is prudent to step back and weigh the cons of an investment, Caterpillar could still make a good long-term bet for value investors. Stay tuned.

The article 4 Reasons Caterpillar Could Trend Lower in the Near Future originally appeared on Fool.com and is written by Neha Chamaria.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.