Shares of industrial machinery company Caterpillar fell more than 3% during trading hours Monday after analysts at Goldman Sachs downgraded the company from neutral to sell. The analysts set a 12-month price target of $51, well below Caterpillar’s previous close of $60.98. After spending an estimated $800 million on restructuring costs in 2015, Caterpillar now faces slowing global demand for its products, especially in emerging economies.
GOldman stated in the report:
We downgrade CAT to Sell from Neutral with a $51, 12-month price target (16% downside, vs 6% avg. coverage upside) as we see sustained lower returns on capital in this cycle driven by an extended rationalization in global infrastructure capex and excess machinery capacity. We have been Cautious on Machinery since July, with Sells on stocks with significant leverage and challenged returns (NAV, JOY, KBR, JEC). We are clearly not early on CAT, but our 2017 EPS is now 15% below consensus and our company and country-level commodity reinvestment analysis suggests capex in CAT’s primary end markets is above mid-cycle levels, in contrast to consensus expectations of a 2016 EPS bottom.
1) We see a sustained right-sizing of commodity capex allocation in this cycle due to challenging producer returns and balance sheets – factors that we expect to drive lower cycle over cycle machinery demand and utilization.
2) Structurally lower returns on capital driven by excess capacity. For CAT, our 2017E CROCI forecast of 9% is below a 20-year average of 11% due to meaningful excess supply – asset turns are 20% lower – while EBITDA margins of 13% are still modestly above the average.
3) Commodity over-supply to drive sustained capex shift (30% of CAT sales). Commodity producers are still completing long-lead time projects from the last cycle, driving elevated reinvestment rates through 2017.
4) Shift lower for machinery demand in commodity export countries (25% of CAT sales). We see accelerating deterioration in machinery sales to commodity export countries driven by declining direct commodity capex and a broader slowdown in government and private investment.
The following visualizations highlight the current day and 2-year performance of Caterpillar stock, as well as the company’s net income & profit margin for the last 5 quarters.\\aterpillar Inc. (CAT) Stock Price – Current Day
Caterpillar Inc. (CAT) Stock Price – 2 Years
Caterpillar Inc. (CAT) Net Income & Profit Margin – Last 5 Quarters