Avoid Caterpillar And John Deere

Macquarie has recommended investors to avoid shares of equipment makers Caterpillar Inc. CAT and Deere & Company DE citing a challenging year ahead.

The brokerage has an Underperform rating on both stocks, with price targets of $51 and $58, respectively.

"We continue to recommend investors sell Caterpillar on any strength in the stock and remain Underperform as we think 2016 will be a challenging year given we think the worst of the oil and gas declines are still ahead of us," analyst Sameer Rathod wrote in a note.

"We think the continued weakness in pricing is attributable to softening end-market demand, excess inventory, and increased competition. We continue to think pricing will be weaker in 2016 than 2015 given the weak end market demand we see," the analyst elaborated.

Rathod said the global dollar value of inventory increased by 6.5 percent month over month and US-listed inventory rose 8.1 percent, indicating "continued weakness in end markets."

The analyst is starting to see the deflation due to excess liquidity and malinvestment in supply and thinks "this trend is likely to continue and price erosion and pressure on margins will become a larger factor in coming quarters."

On Deere, Rathod noted, "We see declines continuing through 2016 given the young fleet age, excess new and used inventory, and continued weakness in grain and oil seed prices. Given the economic dislocation in Brazil, we continue to think LATAM will surprise to the downside."

The analyst views that equipment prices continue to weaken at the used level and for this month, inventory declined marginally. However, inventory for combines and utility tractors continued rising in the United States.

"We would use any strength in share prices to sell Deere, AGCO Corporation AGCO, (Underperform, TP: $35.00), and CNH Industrial NV CNHI (Underperform, TP: $5.00)," he added.

Shares of Caterpillar were down 0.20 percent to $75.09, while Deere is up 0.14 percent to $76.18.