Caterpillar Has Various Levers To Pull If Demand Falls Further, Says Credit Suisse

Caterpillar Inc. CAT has various levers to pull, including incremental restructuring, if demand falls further, according to Credit Suisse analyst Jamie Cook. "While CAT is committed to its outlook provided on the Q4'15 EPS call, if demand were to demand deteriorates further, there are incremental levels to pull like including incremental restructuring, research and development and cap ex to maintain the 25% -30% decremental," Cook wrote in a note. This would be in addition to the $2 billion worth restructuring actions announced in September 2015, which will save about $1.5 billion over the next several years. Additionally, once complete Caterpillar will have reduced square footage by approximately 20 percent. The analyst said the recently announced restructuring is "on track." Meanwhile, research and development remains at elevated levels despite the severity of the downturn. In 2015, Caterpillar spent $2.16 billion. Management would consider research and development cuts assuming demand deteriorates further. "CAT has reduced spend in non-core areas but continues to invest heavily in vehicle efficiency and broader technology solutions (e.g., automated mining, digital opportunities, machine control guidance on job sites, analytics solutions)," the analyst noted. With regards to Enterprise Initiatives, Cook said the company is on track to meet the lower end of the $2-4 billion in OPACC (operating cash flow after capital charge) in 2018, reflecting weaker demand. Inventory turns have been holding flat but should improve once demand stabilizes. Cook noted that the mining original equipment and aftermarket remain depressed and unchanged. From the end of 2014, order rates for reciprocating engines into fracking and drilling are down 90 percent. However, Solar visibility remains solid into 2016, and the company noted Solar Turbine orders into 2017. Cook said, "Longer term, CAT is more constructive on NA construction with help from the Highway Bill in 2017. CAT will take down ~$1B in dealer inventory out of the channel in 2016 with Mining and Asian inventories now at healthy levels for the dealer." Cook has an Outperform rating and $72 price target on the stock, which breached its 50-day moving average on Wednesday. It traded recently at $67.36, up 3.2 percent.