Credit Suisse Sees Downside In Ford, Prefers...Caterpillar?

• Ford Motor Company (NYSE: F) shares have dropped 18 percent since December 29, while shares of Caterpillar Inc. (NYSE: CAT) are down 11 percent.
• Credit Suisse analysts maintained a Neutral rating for Ford, while reducing the price target from $15 to $13. The rating and price target for Caterpillar remain at Outperform and $72.
• While Caterpillar has reduced inventories, global inventories are becoming a concern for Ford, the analysts stated.

Ford

Ford reported its 4Q15 EPS at $0.58, ahead of the Credit Suisse estimate of $0.53. Despite the miss, the quarter reflected that the company’s Auto operations were robust, particularly in Europe, China, and Consolidated Asia, all of which improved meaningfully versus their performance in 2H15.

The EPS estimate for 2016 and 2017 have been reduced from $2.10 to $1.92 and from $2.05 to $1.85, respectively, mostly to reflected lower-than-expected NA margin guidance.

“Our cautious view of F has largely been related to elevated future risks related to significant cost increases (continuing in 2016)…but now we are incrementally concerned on inventory / production actions,” analyst Dan Galves wrote.

At yearend 2015Y, global inventory was up 11 percent sequentially and 13 percent y/y, Galves said. He added that key markets like Europe and China were up 28 percent and 25 percent y/y respectively, significantly above demand growth. Ford’s 2015 inventory build “adds downside volume / pricing risk in our view.”

The analyst further commented that despite Ford's US inventory being elevated at yearend 2015, the company’s Q1 NA production guidance is 11 percent above the Credit Suisse forecast. This could “make the inventory situation worse.”

Caterpillar

Caterpillar’s shares climbed almost 5 percent after the company reported a broadly in-line quarter. The company kept the implied EPS for 2016 at $4, reflecting lower sales.

Analyst Jamie Cook mentioned that Caterpillar’s reduced 2016 sales outlook now appears “more reasonable,” with another 15-20 percent decline in Resource, E&T off 10-15 percent and Construction down 5-10 percent.

“Incrementals hold fairly healthy in the low 20's (helped by pension) vs CAT's target of 25-30% with about $720M or $0.85 benefit from restructuring. In fact, CAT is pulled $100M in restructuring actions ahead into Q4'15,” Cook wrote. He added that the company is reducing dealer and its own inventory by an additional $1B each, after having reduced inventories worth $2.5B in 2015.

Caterpillar’s E&T margins were strong in Q4, despite oil and gas headwinds. The analyst expects margins to remain in the low double-digit range exiting 2016.

In the report Credit Suisse noted, “We believe the key for CAT moving ahead is executing on the restructuring, holding the E&T margins and continuing putting up the cash flow to ease investor's fears over a dividend cut which CAT remains committed to protecting.”