Axiom's Gordon Johnson Starts Caterpillar With A Sell, Sees 60% Downside

• Shares of Caterpillar Inc. CAT fell more than 2 percent on Wednesday, trading at fresh 52-week lows of $70.16.
• Gordon Johnson of Axiom initiated coverage of Caterpillar on Thursday with a Sell rating and $28 price target.
• Johnson noted two of the company's three core businesses are "struggling," sees 2016 earnings per share of $2.79 versus the Street's $4.53 estimate.

Shares of Caterpillar fell to a new 52-week low of $70.16 on Wednesday and continued to decline in Thursday's pre-market session, likely in reaction to a report by Gordon Johnson of Axiom who initiated the stock with a Sell rating and $28 price target.

According to Gordon, Caterpillar could see "modest downsize" to management's second half 2015 guidance and "outsized risk" to 2016 consensus estimates. The analyst noted that two of the company's three core businesses are struggling (Resources and Energy & Transportation). Moreover, with dealer sales in North American construction now "rolling over" (year-over-year growth in Caterpillar's monthly North American construction dealer sales turned negative in June and is now down high-single-digits for three straight months), the company's third core business, Construction, as "transient."

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Gordon said Caterpillar benefited from China's 2009 stimulus package and near-zero interest rates globally in withdrawal. The analyst is estimating the company's 2016 earnings per share will moderate to $2.79 from $5.07 in 2015, only to fall even further to $1.73 in 2017.

Gordon also pointed out that many investors "pay little attention" to Caterpillar's SEC filings, which may suggest the company is using debt to fund sales where revenue is recognized between itself and wholly-owned foreign subsidiaries for which "there is no off-taker at the end of the transaction." The analyst added that proof to this may be found in its "swelling" deferred revenues in times of financial duress, with prior peaks in 2013 and 20018 when the company was under "significant" financial pressure. However, now that the SEC has taken notice, the company's ability to "execute this magic" during the current "significantly worse" downtown is "limited."

Bottom line, Gordon stated that Caterpillar is a "short, with material downside" while future earnings risks is "not fully understood by those who currently hold the stock."