Argus: Caterpillar Has 20% Upside Even If It Can't Hit Cyclical Highs

Shares of Caterpillar Inc. CAT have outperformed the overall market in the last three months. Argus’ John Eade upgraded the rating for the company to Buy, with a price target of $92. The analyst noted that Caterpillar’s business has begun to improve, albeit slowly, and its valuation remains attractive, despite the recent upturn.

Caterpillar’s shares have gained 30 percent in the last three months, versus a 9 percent gain in the S&P 500 and a 14 percent increase in the Industrial sector ETF.

Strengths And Weaknesses

Caterpillar has a robust balance sheet and its focus is on returning capital to shareholders. Although the company’s business is highly cyclical, the firming up of key commodity prices could lead to better results in the near future, analyst John Eade said. He added that the company was taking steps, like cutting jobs, to restructure its business.

“Despite the recent run, the shares appear to offer value, and there are some bright spots in the latest results. We are establishing a price target of $92, which implies upside of 20% from current levels but is still 20% below the latest cycle highs,” Eade wrote.

Caterpillar reported weak 1Q16 results and reduced its full-year sales and non-GAAP EPS outlook. The company faces a range of operational and financial risks. Eade added that the company’s future performance could be hurt by interest rates, unfavorable exchange rate movements, declining commodity prices and weakness in the construction and mining industries.