Here's Why Caterpillar Stock Is Having a Tough Day

Shares in Caterpillar (NYSE: CAT) were down by 3% in today's trading at 3:20 p.m. ET. The decline comes on a bad day for the markets overall and, more importantly, for the commodities that drive orders for its machinery.

Caterpillar's end markets

Caterpillar is well known for its construction equipment and its sales aligning with the construction cycle. And it plays a significant role in mining machinery, gas turbines, generators, solar gas turbines/compressors, and energy storage, with some construction machinery sales supporting energy project investments.

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The company can be viewed as a play on the commodity supercycle, balanced with construction demand and ongoing infrastructure needs.

Unfortunately, the overall thesis got hit today, with fears over global growth hitting sentiment for its construction equipment end markets. At the same time, declines in oil, natural gas, copper, and other commodities hurt the supercycle thesis.

What it means to investors

The market is concerned that the escalating conflict over tariffs is creating uncertainty. Many companies and consumers delay or cancel orders when faced with the unknown. As such, investors can expect many companies to warn of challenging near-term trading conditions in the current earnings season.

Still, it's important to keep some perspective here. Caterpillar's current market cap of $135 billion is interesting because it puts it at 18 times the midpoint of management's estimate for its free cash flow (FCF) of $5 billion to $10 billion through the cycle.

Meanwhile, despite recent declines, the prices of energy and other commodities are still at levels conducive to investment. If the tariff conflict gets resolved -- and no party has said it is against doing a deal -- then Caterpillar would be a good value now. It's probably not quite there yet, but the stock is becoming interesting.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.