Caterpillar Hopes To Emerge From Its Cocoon In 2017

Morgan Stanley sees continued risks to Caterpillar Inc.'s CAT outlook as the company is hoping for a turnaround in its fortunes in 2017.

Caterpillar lowered its FY 2016 EPS guidance for the third time this year and sees EPS of $3.25. The company earlier guided FY16 EPS of $3.55 last quarter and $3.70 the quarter before.

“We see continued risk to the outlook, given it embeds a 2H17 improvement. Maintain EW,” analyst Mili Pothiwala wrote in a note.

The current FY 2016 EPS forecast implies fourth quarter EPS of just $0.67 versus legacy consensus of $1.00.

The company initiated sales guidance for FY 2017, which assumes a flat outcome versus the lowered target for 2016 ($39 billion).

“Although FY17 sales guidance was in line with expectations, management highlighted more risks to 1H (where the comp is easing) and noted that guidance 'does rely on a 2H improvement,'" Pothiwala highlighted.

The company expects to continue to underproduce retail in a flat end market environment next year, while incentive comp is expected to be a $500-$600 million year-over-year headwind next year.

“North American construction has weakened, and this is likely to pressure 2017 as well,” Pothiwala added.

The analyst maintained Equal Weight rating on the stock, with a price target of $80.

At time of writing, shares of Caterpillar were down 0.45 percent to $84.10.