Goldman Downgrades Caterpillar To Sell

• Shares of Caterpillar Inc. CAT have declined 15 percent over the past three months, to a low of $58.81 on January 20.
• Jerry Revich of Goldman Sachs has downgraded the rating on the company from Neutral to Sell, while lowering the price target from $67 to $51.
• Revich expects an extended commodity deflation cycle, with 16 percent downside risk to the stock valuation.

Analyst Jerry Revich expects “sustained lower returns on capital in this cycle driven by an extended rationalization in global infrastructure capex and excess machinery capacity” for Caterpillar.

With the 2017 EPS estimates 15 percent below consensus, Revich explained that Caterpillar’s capex in its primary end markets was above the mid-cycle levels.

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“We see a sustained right-sizing of commodity capex allocation in this cycle due to challenging producer returns and balance sheets – factors that we expect to drive lower cycle over cycle machinery demand and utilization,” Revich went on to explain.

Excess capacity, in turn, is expected to lead to lower returns on capital, while commodity oversupply is likely to lead to sustained capex shift of an estimated 30 percent of the company’s sales.

“Commodity producers are still completing long-lead time projects from the last cycle, driving elevated reinvestment rates through 2017,” according to the Goldman Sachs report.

Also, machinery sales to commodity export markets are expected to increasingly deteriorate, driven by a decline in direct commodity capex, along with a broader slowdown in private and government investment.