Why Caterpillar isn’t Pulling up? Just Blame it on the Oil
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The recent economic slowdown in many leading economies has adversely affected many stocks. During the year (YTD), the S&P 500 index rose by only 5.9%. This economic slowdown has also adversely affected the potential growth of Caterpillar Inc. (NYSE: CAT). Despite the company's growth and strong financials, it still managed to shed nearly 11% off its stock price during the year. What could explain this decline? Oil.
The economic growth of the U.S is among the key generators for the growth of Caterpillar. One basic and straightforward index that could be used to examine the economic growth of the U.S economy is the S&P 500 index. During 2012, this index only rose by 5.9%. The linear correlation between the S&P 500 and Caterpillar's stock price reached 0.71 during 2012. This means that nearly 51% of the company’s stock could be explained by the recent changes in the S&P 500. During June and July the linear correlation rose to 0.8.
The chart below shows the developments of the S&P 500 and Caterpillar during 2012. It shows how the relation between the two is very strong.
There were also reports of a rise in shipments of manufactured durable goods during May, and in particular a rise in heavy duty truck bodies, parts, and trailers. The reports show positive news in Caterpillar’s industry that should have positively affected the company’s stock price.
Is the ongoing decline in Caterpillar’s stock price due to the company’s growth and financial reports? On July 25th the company will publish its second quarter FR, and it will reveal if there is something that should make inventors concerned. During the first quarter of 2012 the EBIT reached 2,411 million, which is a 15% increase form the previous month and represents nearly 15% profitability.
So now we come to oil prices.
During the year (2012), the linear correlation between Caterpillar’s stock price and oil prices was 0.48 (the percent changes daily); this means that under certain assumptions (including linearity of relation and normality of price changes) the changes in oil price could explain nearly 23% of the variance of Caterpillar’s stock. This is a high R square. During June/July the correlation reached 0.67.
In 2012, the price of oil fell by 18.5%. United States Oil (NYSEMKT: USO) also declined by nearly 23%. Further, according to the company’s financial reports, a rise in oil prices induces the demand for power systems (page 15):
“Worldwide demand for energy and higher oil prices are encouraging customers to invest, and we are seeing stronger demand for engines and turbines for petroleum applications.”
Therefore the decline in oil prices might be among the key factors to reduce the future demand for power systems and thus may have adversely affected Caterpillar’s stock. And, if oil prices continue to dwindle, it may signal another decline for CAT. Nevertheless, the company’s upcoming financial reports might provide a better indication of how the decline in oil prices has had an adverse effect on the company’s financial results.
On a final note, in regards to natural gas, the situation is different because gas and coal are changeable; and since CAT services both industries, the movements from coal to natural gas shouldn't adversely affect the company. Therefore, the movement of the price of natural gas or United States Natural Gas (NYSEMKT: UNG) shouldn't affect the company's stock price. During 2012 the linear correlation between UNG and CAT reached -0.03.
This report on Oil and Caterpillar was first published in Trading NRG
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