Bull Thesis Losing Ground At Caterpillar

• The share price of Caterpillar Inc. CAT has declined 19.66 percent year-to-date.
• Baird’s Mircea (Mig) Dobre has downgraded the rating on Caterpillar to Neutral, while lowering the price target from $89 to $77.
• Dobre believes that it is increasing unlikely that the company would see a rebound in bookings over the next few quarters, and that the consensus forecasts for 2016 could prove too optimistic.

Dobre expressed concerns regarding the macro volatility in China and several mining OEMs reaffirming further deterioration and lower visibility going forward.

It has earlier been expected that there would be stabilization in key commodity categories, with the Resources business driving potential upside over the forthcoming quarters, “quarters driven by aftermarket and potential for replacement demand green shoots.”

However, since May, the macro volatility in China has had a negative impact on commodities, “as questions surrounding demand added to excess supply concerns,” the Baird report said, while adding that “peer OEM commentary and results are suggesting that fundamentals can actually get worse rather than better in the near term.”

Given that mining has been deteriorating, oil & gas has remained under pressure and demand for construction equipment has been weakening across the globe, bookings appear unlikely to rebound in the near term.

However, Dobre added that Caterpillar might rally back, given that China continues to be a major unknown, stabilization could help lift global cyclicals, and there could be upside if there is better than expected SOLAR and a multi-year U.S. Highway Bill is passed.

The EPS estimates for 2015 and 2016 have been lowered.