Caterpillar Inc. (CAT) Is Going Down, But It’s Not Alone

There are not many new projects or capacity additions happening in the mining industry that can help drive Joy Global Inc. (NYSE:JOY)’s order book at the current levels. Although there are some bright spots like the US coal end market, where the company expects to see some strength, they are not enough to offset weaker end markets like Chinese coal and global steel.

The stock doesn’t look expensive at 8.25x, but if we factor in next several years of declining EPS, it is appears the best decision is to avoid it.

Another equipment company that is likely to face significant headwinds going forward is Terex Corporation (NYSE:TEX). Terex Corporation (NYSE:TEX) is a “mini Caterpillar” present in similar end markets as Caterpillar and offering competitive products. One of the main problems with Terex is that if Caterpillar Inc. (NYSE:CAT) starts getting aggressive on pricing (i.e. discounting) due to a prolonged slowdown, Terex Corporation (NYSE:TEX) will also have to do the same to protect its market share.

In addition since Terex is present in similar end markets as Caterpillar, it is also likely to witness slowing end markets and subsequent dealer inventory reduction. In fact this really is the case. In June, Terex’s management slashed its guidance given greater than expected weakness across its construction, material handling and port solution, and crane business.

The company has seen a sequential decline in backlog in the last few quarters, a trend which is likely to continue going forward. Although the company’s management has emphasized their focus on margin improvement and cash generation in 2013, there is little visibility on how they will achieve it. The company is trading at more than 14 times current year earnings and is the most overpriced one among its peers. Hence, I recommend avoiding it.

To sum up, Caterpillar is an industry bell weather, and if it is seeing some significant slowdown, many of its smaller peers are likely to see similar trends. Joy Global is the most exposed to mining which is the weakest end market for the equipment manufacturer, while Terex is one of the most overpriced stocks on a PE basis. I recommend avoiding all three stocks.

The article Caterpillar Is Going Down, But It’s Not Alone originally appeared on Fool.com and is written by Ash Sharma.

Ash Sharma has no position in any stocks mentioned. The Motley Fool owns shares of Terex. Ash is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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