So, how is everyone enjoying the roller coaster this morning?
From April 2 to April 8, the S&P 500 index of America's 500 biggest companies fell more than 12%, before surging back 9.5% yesterday alone as investors cheered an apparent 90-day delay in the imposition of President Donald Trump's reciprocal tariffs on just about every country we trade with (except China). One overreaction led to another, but this morning, investors are already having second (or is it third?) thoughts about just how good even this good news can be, when things seem so uncertain in the stock market right now.
As I type these words, for example, at 10:12 a.m. ET the S&P is down again -- 3.1%. Even blue chip industrial stocks are feeling kind of queasy, as GE Aerospace(NYSE: GE) gyrates 2.8% lower, Deere & Co.(NYSE: DE) stumbles 3.1%, and Caterpillar(NYSE: CAT) is particularly cranky with a 4.3% loss.
What's ailing industrial stocks today?
Earlier in the week, you may recall, all three of these industrial stalwarts got dinged with downgrades by top Wall Street analysts. On Tuesday, Citigroup lowered its price targets on both Deere and Caterpillar on worries that rising tariffs will "negatively impact U.S. farmers' exports and profits, likely extending the agriculture downcycle in North America," as The Fly reported at the time.
Earnings season is just starting to ramp up, but as Citi fellow Wells Fargo pointed out, "earnings may not matter as much as what happens with tariffs," and, for its part, Wells is planning to "lean defensive" on stock investing until the tariff situation settles down a bit.
But didn't Trump remove the tariff threat yesterday? Well, yes and no. The president suspended imposition of massive reciprocal tariffs for many countries, but we don't precisely know which countries yet (although we think we know that China is not one of them). And that means that the tariff risk hasn't really gone away. It's more like it's just hiding in the bushes, ready to leap out without warning again at any time.
How should investors think about GE Aerospace stock right now?
Now, the good news is that not all stocks are created equal, and even among stocks that seem similar -- big industrial giants such as GE Aerospace, Deere, and Cat -- the risks may also be unequal. This morning, for example, Citi chimed back in to opine that "defense companies have little exposure to tariffs," and that, in its opinion, this makes GE Aerospace (which sells airplane engines to the military as well as to commercial customers) somewhat of a safer play than other stocks in this sector.
I'm not sure I agree with that, however.
Valued at 29.4 times trailing earnings, GE looks pretty pricey on the surface, even without the prospect of tariffs dinging its business. Free cash flow at the aerospace giant, however, looks exceedingly iffy at barely half the level (56%) of reported profit, meaning the stock's price-to-free cash flow ratio is a whole lot higher than its P/E ratio may make you think. Plus, tariffs still could ding GE's business, if travelers fly less in this time of uncertainty, for example, airlines buy fewer planes, and plane makers buy fewer engines from GE.
Long story short, there's too much risk here even before accounting for tariff risk to entice me to buy GE stock.
How should investors think about Deere stock right now?
Moving on, let's next take a gander at Deere.
With a $119 billion market cap and $6.2 billion in reported earnings, Deere stock looks cheaper than GE Aerospace at first glance (a P/E of only 19). Unfortunately, just like GE, Deere suffers from weak free cash flow. For every $1 of "earnings" it reports, the company generates only about $0.68 in real free cash flow.
This pushes Deere stock's price-to-free cash flow ratio up past 28 times. Even at a projected 15% long-term earnings growth rate, I'm afraid this price, too, is too expensive. It's much too expensive to attract me with the tariffs question still up in the air. With foreign countries still talking about imposing their own tariffs on U.S. exports, and Deere getting more than 40% of its sales from exports, I'm leaving Deere stock on the shelf as well.
How should investors think about Caterpillar stock right now?
Last but not least: Caterpillar.
Valued at $138 billion and with $10.8 billion in trailing earnings, Caterpillar is the cheapest of these three big industrial stocks at a P/E ratio of less than 13. Free cash flow at Cat is still an issue; the company generated only $8.8 billion in FCF last year. Still, that only pushes the stock's P/FCF ratio up to 15.6.
With a 7% long-term projected growth rate and a modest 1.9% dividend yield to support its stock price, I find Caterpillar stock the least-worst stock of these three today. It's still not quite cheap enough to convince me to buy, but the stock's significantly cheaper than its close rival Deere, and a whole heck of a lot cheaper than GE Aerospace.
Should our current tariffs tantrum continue, and the stock market take another, deeper turn for the worse, Caterpillar stock will be at the top of my shopping list.
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Wells Fargo is an advertising partner of Motley Fool Money. Citigroup is an advertising partner of Motley Fool Money. Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Deere & Company. The Motley Fool recommends GE Aerospace. The Motley Fool has a disclosure policy.
