Goldman Remains Cautious On Construction Machinery Names

Jerry Revich of Goldman Sachs maintained a cautious view on the Machinery and Engineering & Construction sector in a note on Monday. Revish highlighted two ongoing concerns that can plague the sector: 1) an extended commodity deflation cycle, and 2) an ongoing multi-year capex reduction that diminishes the demand for heavy machinery.

Revish downgraded shares of KBR to Sell from Neutral and expects further downside to his $19 price target given a "challenging outlook" for the company's medium-term earnings growth. The analyst also noted the company will suffer from "significant" cuts to large scale energy projects. Revish did however note that he is "positive" on KBR's turnaround progress. However, additional margin expansion moving forward will "prove challenging," especially in the ongoing commodity deflation cycle.

Revish maintained a Neutral rating on shares of Caterpillar with a price target lowered to $67 from a previous $72. The revised price target is based on a five percent drop in Construction Industries sales, and a reduced EBITDA margin estimate in Resources. The analyst noted that his Neutral rating remains unchanged given the company's competitive position within the "challenging end market." In addition, the company could benefit in 2017 as US shale capex profiles begin recovering.

Finally, Revish maintained a Sell rating on shares of Joy Global with a price target lowered to $8 from a previous $14 due to a five percent reduction in aftermarket sales forecasts and lower Underground new equipment sales versus prior expectations. Revish added that even though Joy Global's stock is already "down significantly" over the past two years, it is still important to keep in mind that: 1) coal is "structurally" losing share to natural gas and alternative energy sources, 2) the base metals deflation cycle remains in the "early stages," and 3) the company's tangible book value of $900 million is higher than the stock's $1.4 billion market cap.