One of America’s most iconic companies in the construction industry was downgraded drastically by Wall Street analysts. Caterpillar was downgraded by Chad Dillard, an analyst at Deutsche Bank, who expects shares of the American giant would drop at least 8 percent.
Dillard went on to say that the biggest risk for Caterpillar is that the company’s order backlog will decline over the next few months. The company reported in late January that the order backlog for their equipment was at $16.5 billion, which had gone down by 4.6 percent from the end of the third quarter.
“Synchronized global growth has collapsed, the China land cycle is rolling over (and will continue to weaken (and will continue to weaken despite the single positive data point this week), Europe is slowing more than expected and the U.S. is oversaturated with construction equipment,” Dillard wrote in a note. “Each of these factors alone are powerful drivers of [Caterpillar’s] earnings, but together this synchronized slowdown will not only usher in a negative earnings revision cycle, but also make 2019 the cyclical peak.”
At the same time, over half of Caterpillar’s revenue in 2018 came from outside of the US, with much of this revenue stream originating from China. The company announced that it expected international demand to be roughly flat in 2019 assuming the Chinese economy doesn’t slow down even further, something that many believe to be quite possible.
“While we acknowledge that management has done a tremendous job improving cross-cycle earnings power and the balance sheet optionality is impressive, we fear this positives are already priced in and the oncoming down-cycle is too powerful to overcome,” Dillard added.
These sentiments echo sentiments of another Wall Street analyst, Steven Fisher from UBS, who also downgraded the company’s stock in February. At the time, Fisher downgraded Caterpillar by two notches as one of his rare “sell” ratings and reduced his target stock price to around $125 per share.
“We believe many of [Caterpillar’s] key end markets, notably North American construction, China construction and oil and gas are approaching peak demand levels in 2019 and will roll over in 2020,” Fisher wrote at the time. “We do not believe an earnings decline is priced into the stock.”
While Caterpillar shares have rallied around 15 percent over the past three months, the company still has been declining over the past year, dropping 3.3 overall over the past 12 months. Today saw share prices dip around 0.66 percent, which is a reasonable daily move for a company of such size. Overall, Caterpillar looks like it will be one of many companies that will struggle in the years to come, especially if fears about a coming recession become a reality.
Caterpillar Company Profile
Caterpillar is an iconic manufacturer of heavy equipment, power solutions, and locomotives. It is currently the world’s largest manufacturer of heavy equipment with approximately 16% of global market share in 2017. The company is divided into four reportable segments: construction industries, resource industries, energy & transportation, and Caterpillar Financial Services. Its products are available through a dealer network that covers the globe with 2,163 branches maintained by 172 dealers. Caterpillar Financial Services provides financing to both its customers and dealers. – Warrior Trading News
