Seeing A Recovery Already Priced In, Citi Remains Neutral On Caterpillar Stock

Citi’s Timothy Thein believes the proposed merger of Komatsu Ltd (ADR) KMTUY and Joy Global Inc. JOY would create a strong competitor for Caterpillar Inc. CAT, although greater long-term risk are likely to be associated with OEMs with narrower product lines.

Thein maintains a Neutral rating on Caterpillar, with a price target of $82.

Improvement Underway

The analyst said, “CAT will have time to shore-up its dealer base in regions where we think some ground was lost post-BUCY.”

In addition, the increasing commodity prices have been helping to improve earnings and free cash flow prospects for the company’s mining customers, and the analyst expects a capex trough in 2017.

“CAT's direct hard rock leverage is low, but we note that gold has historically led base metals prices,” Thein stated.

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On the other hand, the analyst believes the high stock levels of used equipment, combined with ongoing efforts by miners to increase productivity of their existing assets, would dampen the OE recovery.

RI Recovery

Caterpillar expects RI to move toward breakeven levels in 4Q16, a trend that Thein expects to be carried into FY17, with RI “in the black.”

Thein also noted, “Ongoing restructuring benefits, more normal R&D spend and above-avg incremental volume leverage should more than offset stiffer price/cost headwinds.”

The analyst believes that the current stock valuation already prices in an RI recovery scenario.

Full ratings data available on Benzinga Pro.