Bank Of America Sees 20% Upside In Caterpillar

The economic boom cycle remains in the late stages, but recent macro events now supports a bullish stance on Caterpillar Inc. CAT, according to Bank of America.

The Analyst

Bank of America's Ross Gilardi upgraded Caterpillar from Neutral to Buy with a price target lifted from $140 to $163.

The Thesis

The recent truce to the U.S.-China trade war could be seen as a move to de-escalate tensions between the two countries and could be sufficient for investors to "look through a few more months of tougher retail comps" for Caterpillar, Gilardi said in a note. This should help push Caterpillar's stock valuation from its current 10.9 times 2019 estimated EPS to 13 times, which is still below its 15 to 16 times historical average.

Gilardi says Caterpillar should also benefit from Federal Reserve Chairman Jerome Powell after his comments last week suggests a "less hawkish" stance on future interest rate increases.

Caterpillar's stock price is highly correlated with the movement of oil prices and a sustainable rebound in the commodity could prove to be a catalyst in the stock, Gilardi said.

Caterpillar's solar turbines happens to be the company's most profitable business and could benefit in certain key basins like the Permian, which lacks proper pipeline infrastructure.

Price Action

Shares of Caterpillar were trading higher by 2.5 percent to $139.09 at time of publication.

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