Caterpillar's Risk-Reward Is Attractive, Goldman Sachs Says In Upgrade

Caterpillar was upgraded by Goldman Sachs Thursday on the basis of an improving machinery sector outlook.

The Caterpillar Analyst 

Jerry Revich upgraded Caterpillar Inc. CAT from Neutral to Buy with a price target lifted from $158 to $168.

The Caterpillar Thesis

An end to the U.S. machinery recession is increasingly visible, as the sector has corrected by an average of 4% year-to-date, Revich said in the Thursday upgrade note. (See his track record here.)

The recovery is driven by a combination of macro risks, including the coronavirus outbreak and investor destocking driven by negative estimate revisions, the analyst said.

U.S. machinery lead indicators have continued to improve, and used construction equipment inventories are up 3% year-on-year, he said.

A combination of factors are behind the upgrade, Revich said, such as the tightening U.S. construction equipment capacity utilization; dealer inventories; a backlog approaching trough levels; and margin tailwinds in 2021 from reduced restructuring and inventory destock.

“We also see attractive valuation risk-reward, with the stock trading at 13x cash P/E (15x GAAP) on 2020E sales that are below trend-line for a business with a track record of consistent cycle over cycle earnings growth."

China's Impact On Caterpillar

The analyst acknowledged the coronavirus impact.

“Asia economic growth is a key risk to our call … CAT’s exposure is via its China construction industries (6% of sales) and resources (19%) businesses; our sensitivity analysis implies every 10% reduction in sales estimates in the two segments would drive a 5% EPS impact.”

Caterpillar Price Action

Caterpillar shares were trading down slightly at $139.57 at the time of publication Thursday. The stock has a 52-week high of $150.55 and a 52-week low of $111.75.