Market Overview

The Double Downgrade Hurting Caterpillar's Stock

The Double Downgrade Hurting Caterpillar's Stock

Dow Jones component Caterpillar Inc. (NYSE: CAT) is likely to see around 55 percent of its end markets peak in 2019, followed by declining earnings in 2020, according to UBS.

The Analyst

UBS analyst Steven Fisher downgraded Caterpillar from Buy to Sell with a price target lowered from $154 to $125.

The Thesis

The majority of Caterpillar's key end markets — including North American construction, China construction and oil and gas — have already peaked or will do so in 2019, Fisher said in a Monday downgrade note. 

Other units like global machine retail sales have been moderating since July, while energy and transportation retail sales are "lumpier" and started to decelerate in early 2018, the analyst said. 

The manufacturer is seeing strength in the mining sector, but even when coupled with ongoing share buybacks, it isn't enough to offset the multiple challenges ahead, Fisher said. Caterpillar's 2020 earnings are likely to fall 8 percent from 2019 levels to $11.45 per share versus a consensus estimate of $13.04, he said.

Expectations for lower volume will likely result in margin compression of 100 basis points in 2020, which is worse than current consensus estimates calling for a 30-basis point decline, according to UBS. 

The research firm's revised $125 price target is based on an unchanged multiple of 11 times 2020 EPS estimates.

This multiple assumes peak EPS in 2019, and the Street will likely start revising models downward, pressuring the stock over the next year, Fisher said. 

Price Action

Caterpillar shares were down 2.84 percent at $137.40 at the time of publication Tuesday. 

Related Links:

The Street Reacts To Caterpillar's First Notable Miss In Years

Bank Of America Sees 20% Upside In Caterpillar

Latest Ratings for CAT

Oct 2019MaintainsOutperform
Oct 2019MaintainsOverweight
Oct 2019MaintainsSell

View More Analyst Ratings for CAT
View the Latest Analyst Ratings

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