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The 'Fog Of War' Is Thickening At Caterpillar

The 'Fog Of War' Is Thickening At Caterpillar
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  • Shares of Caterpillar, Inc. (NYSE: CAT) have declined by almost 29 percent year-to-date.
  • Macquarie’s Sameer Rathod has maintained an Underperform rating on the company, while reducing the price target from $60 to $58.
  • Rathod explained that the Underperform rating was maintained due to “the weakening global growth outlook, weaker dealer stats, and continued commentary around price competition.”

According to the Macquarie report the company has lowered its 2015 revenue guidance, while indicating that the 2016 revenue was expected to decline by another 5 percent. Caterpillar also announced that it has started a huge restructuring program to address “the declining outlook.”

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

“We think CAT is taking the right steps to prepare for the coming downturn and would be encouraged to see management forgo any additional compensation given the number of job cuts they will have to execute over the coming quarters,” Rathod stated.

However, Rathod also believes that the 2016 revenue guidance could prove to be “too optimistic,” given the expected slowdown in global growth in 2016, along with intensifying competition.

In fact, according to Rathod, the guidance includes “some resiliency of after market,” which is unlikely, given that the end users are expected to become “increasingly strapped for cash, delaying any maintenance capex.”

The oil and gas segment is expected to witness the worst decline, with “little or no improvement in resources,” while the construction segment is expected to see “corrosive competition,” which would impact revenue and margins.

"We continue to think oil and gas will face the sharpest declines and that there will be little or no improvement in resources. We also think the construction segment will face corrosive competition, likely eroding margin and revenue."

If the downturn continues, Rathod believes that Caterpillar might consider cutting its dividend in 2017/2018 to protect its investment grade credit rating. The EPS estimates for 2015, 2016 and 2017 have been reduced.

Latest Ratings for CAT

Oct 2016BarclaysMaintainsEqual-Weight
Oct 2016JefferiesMaintainsHold
Oct 2016Goldman SachsUpgradesNeutralBuy

View More Analyst Ratings for CAT
View the Latest Analyst Ratings

Posted-In: Macquarie Research Sameer Rathod VetrAnalyst Color Price Target Analyst Ratings Best of Benzinga


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