Can Caterpillar Stock Climb This Chinese Wall?


China's manufacturing sector is contracting at an alarming rate, and Caterpillar's stock may not be able to surmount the obstacles the collapse is throwing in its path.

Instead of eking out a slight expansionary note as economists had expected -- they were looking for China's PMI to come in at 50.4 -- the HSBC purchasing managers index instead slumped to 49.6, indicating that the signals that have been flashing yellow for the past few months are quickly turning red. (Anything above 50 is considered economic expansion; below that threshold is contraction.)

With Caterpillar's first-quarter GDP numbers coming in at an anemic 7.7% rate, significantly below analyst expectations of 8%, the unwinding of the Oriental growth story could plow under the company's potential. It's already taking down mining stocks, as shares of Vale have lost a quarter of their value since the start of the year, while Rio Tinto is down 22%. BHP Billiton is only doing slightly better by losing just under 1% of its value.

Caterpillar reported its earnings the other day, too, and exhibited the ill-effects of this slowdown, but more troubling is that the falling sales it experienced are accelerating. Revenues were down 9% in February, 11% in March, and 13% in April, while the Asia-Pacific region bore the worst brunt of the collapse, as sales plummeted 20%, 24%, and 26%, respectively, in each of those months.

Not that North American sales were any better. While they improved from the 18% drop in the first month of the quarter, falling only 11% and 12% the next two months, respectively, the U.S. manufacturing sector is poised for it's own correction, as well. The U.S. PMI went from a high of 54.2 in February, to 50.7 in April, so don't be surprised if it breaks through the threshold when May's numbers come in.

Additional confirmation of the widening industry stall can be found at Deere , which reported surprisingly good earnings results the other day in contrast to how Cat's numbers looked, but said that sales for the rest of the year would slow substantially. That knocked its stock down 7% in one day.

There's a wall of worry building up that Europe's financial crisis will only get worse. Although we're trying to whistle past the graveyard, with central banksters pumping ever greater amounts of money into the global economy, the situation is quickly slipping through our ability to control events, and Caterpillar's stock could feel the effects. Australia's miners are finding themselves in a deep hole because of China's decline, and now we'll see Caterpillar get bulldozed, too.

Yet, as I've been maintaining, this is a cyclical company, one you want to buy when things are looking bleak, not rosy. When it comes to Caterpillar's stock, we may have that opportunity very soon.

Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in The Motley Fool's brand new report. Just click here to access it now.

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