Shares in Caterpillar (CAT -1.70%) were down by about 7.5% at 11 a.m. ET today as the market continued to sell off equities in the wake of tariff measures imposed on U.S. trade partners. The sell-off in the machinery equipment company's stock is understandable given its exposure to global growth and the possibility that tariff actions will negatively impact its supply chain, making products more expensive and possibly unavailable.
Caterpillar's end-market exposure
A weaker global economy isn't good for sales of Caterpillar's construction machinery, and it's definitely not good for its competitive positioning if tariff actions drive up its costs.
In addition, there's a secondary impact whereby commodities like oil, metals, and minerals are also being sold off heavily. That's likely to impact energy and mining companies' capital spending plans, given that Caterpillar is a major player in mining machinery and the energy markets. Furthermore, its construction and infrastructure machinery is also used in the energy and infrastructure industries.
What's next for Caterpillar?
There's no way to avoid the fact that Caterpillar is exposed to the commodity cycle and operates in highly cyclical industries like construction. That's not a good place to be if a trade war leads to slowing growth. It's also likely to challenge Caterpillar's ability to compete in its end markets.
Image source: Getty Images.
That said, it's unclear how long these tariff actions will last, and whether they are merely the prelude to negotiations over trade deals that might ultimately result in U.S. exporters getting a fairer shake in competing internationally. That could be a good outcome from the current turmoil.
