Implications For Caterpillar Amid Continued Strength In Chinese Excavator Industry

Sameer Rathod of Macquarie said Caterpillar Inc. CAT would face pricing pressure near-term in the Chinese excavator market, but the company's strong market share in the country will help the company navigate those hiccups in the long term.

Rathod highlighted, "CAT market share grew 81bps YoY (2.4ppt on a 6-per monthly average basis) to 12 percent in the month of March. That said, CAT continues to be the top foreign producer in China and is the number 2 in excavator market share. Over the past few months the market share has become more concentrated for the larger players at the expense of the smaller players."

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The analyst continued, "In the near term we think CAT and others will continue to face corrosive competition leading to pricing pressure. Long term, we think the gain in market share will solidify their presence in the country."

Looking Deeper Into The China Factor

Rathod elaborated, "Total Chinese excavator unit sales increased 19.4 percent YoY in March and increased 15 percent YoY on a trailing 3-month total basis compared to the same time period last year. CAT sales grew 28 percent YoY in March and grew 33.7 percent on a trailing 3-month basis compared to the same time period last year."

However, the analyst also noted, "Now that seasonal factors are stronger then cyclical factors from a time-series analysis perspective, we think the Chinese excavator market is finding a bottom. Unfortunately this stability comes at ~90 percent off the peak."

"That said, we think it will take a considerable time before we see a meaningful upturn in Chinese excavators, given the over investment in fixed assets since the financial crisis," he added.

Rathod maintained his Underperform rating and $51 price target on CAT shares, saying "finding a bottom in the market without a doubt is a positive; however, we think CAT will see declining earnings into 2017, given their oil and gas exposure."

Shares of Caterpillar were recently seen up 2.3 percent at $76.35.