Market Overview

Goldman Upgrades Machinery Sector From Cautious To Neutral

Share:
Goldman Upgrades Machinery Sector From Cautious To Neutral
Related CAT
Wild Times: Market Seems To Seek Solid Ground After Monday's Manic
These Are The Biggest Stocks Reporting Earnings This Week, And Their Recent Track Records
Enphase Sells Out Q3/Q4 (Seeking Alpha)
Related JOY
18 Biggest Mid-Day Gainers For Tuesday
A Peek Into The Markets: U.S. Stock Futures Down Ahead Of International Trade, Factory Orders Data

A recovery in Chinese construction demand has led Goldman Sachs to upgrade Joy Global Inc. (NYSE: JOY) and Caterpillar Inc. (NYSE: CAT) to Neutral from Sell, while upgrading the broad machinery sector to Neutral from Cautious.

Joy

Analyst Jerry Revich is concerned about Joy's exposure to high-cost mining regions longer-term, but sees "potential for a capex recovery if the Chinese construction recovery continues."

"We estimate 70 percent upside to new equipment capex if spot commodity prices are sustained," Revich concluded.

The analyst raised his 2017–18 EPS estimates to $0.34/$0.38 from $-0.37/$-0.50, driven primarily by higher new equipment sales forecasts.

Related Link: Jefferies Looking For "Green Shoots" In Machinery Stocks: What That Means

"We estimate $1.50 as mid-cycle EPS. Our estimate is based on new equipment sales of $1.2 billion – equivalent to 2014 levels and 100 percent above 2016E sales; and aftermarket sales of $2.0 billion – in-line with 2017E and 36 percent below 2012 peak," Revich said.

The analyst, who raised Joy's price target to $24 from $13, noted "stabilization in total mining capex budgets could be enough to drive normalization in equipment demand."

However, long term, Revich continues to see "market share risk for North American coal and iron ore due to significantly higher ore grades – and as a result lower costs – in Australia and South America."

According to the analyst, Joy "derives 16 percent of sales from Australia compared to Australia's over 40 percent share of seaborne iron ore and met coal markets."

Caterpillar

On Caterpillar, Revich said a sustained China construction recovery has increased iron ore spot 20 percent higher since February, and could contribute to a recovery in machinery share of mining capex.

"Our Sell rating on CAT was based on our view of an extended downturn in US pipeline, global mining, and construction capex for commodity export countries. We cited improved commodity supply-demand balance and a weakening US$ as key risks to our call, which have played out as we did not anticipate a sustained China construction recovery," Revich noted.

The analyst, who expects mid-cycle resources sales of $7.1 billion compared to $5.9 billion in 2016E, said, "Incremental sales could come at 40 percent incremental margins." Revich raised his price target on the stock to $78 from $62.

However, he remains concerned about the gas compression capex cycle and still expects "the pace of U.S. pipeline capacity additions to slow, with a 45 percent decline in growth capex in 2017 compared to 2015 levels."

"We see a $300 million headwind in 2017 vs. 2016 EBIT, net of the impact of CAT's service business," Revich noted.

Related Link: Caterpillar CEO: We're Near Bottom

Broad Analysis

On the sector, the analyst sees potential for mining equipment share of capex to return to historical average, implying "a doubling in new equipment sales off 2016 levels." Revich also highlighted that the construction machinery demand in commodity export countries could improve if the current commodity recovery is sustained.

"While capex/FCF is above the historical average, we note that if spot prices hold, earnings power for the major global miners would improve by 80 percent – a scenario that would take capital allocation toward capex to historical lows."

That said, the analyst is not positive on the sector due to oversupply of Machinery in many regions of the world "with pockets of pricing pressure."

A Few Favorites

Revich's top picks in the sector include Trimble Navigation Limited (NASDAQ: TRMB), WABCO Holdings Inc. (NYSE: WBC), Allison Transmission Holdings Inc (NYSE: ALSN) and PACCAR Inc (NASDAQ: PCAR).

In addition, Goldman still prefers construction productsover machinery and E&C, with Buy ratings on Vulcan Materials Company (NYSE: VMC), Martin Marietta Materials, Inc. (NYSE: MLM) and Summit Materials Inc (NYSE: SUM).

Shares of Caterpillar fell 2.36 percent to $76.48, and Joy Global dropped 2.09 percent to $20.14.

Latest Ratings for CAT

DateFirmActionFromTo
Oct 2018DZ BankUpgradesSellHold
Oct 2018Credit SuisseMaintainsOutperformOutperform
Oct 2018JefferiesMaintainsHoldHold

View More Analyst Ratings for CAT
View the Latest Analyst Ratings

Posted-In: Goldman Sachs machineryAnalyst Color Upgrades Price Target Top Stories Analyst Ratings Trading Ideas Best of Benzinga

 

Related Articles (CAT + JOY)

View Comments and Join the Discussion!

Latest Ratings

StockFirmActionPT
LXFTKeyBancDowngrades0.0
CPAImperial CapitalDowngrades68.0
PRMWImperial CapitalInitiates Coverage On18.0
TGTKeyBancInitiates Coverage On110.0
QCOMMorgan StanleyUpgrades0.0
View the Latest Analytics Ratings
Don't Miss Out!
Join Our Newsletter
Subscribe to:
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Daily Analyst Rating
A summary of each day’s top rating changes from sell-side analysts on the street.
Fintech Focus
Your weekly roundup of hot topics in the exciting world of fintech.
Thank You
for registering for Benzinga’s newsletters and alerts.
• The Daily Analysts Ratings email will be received daily between 7am and 10am.
• The Market in 5 Minutes email will be received daily between 7am and 8am.
• The Fintech Focus email will be received every Friday between 2pm and 5pm.

After-Hours Recap: Index Movers, Earnings And Charter-Time Warner Cable Deal

Departure Of TrovaGene CCO Creates Near-Term Risks; Cantor Downgrades Stock