BofA Downgrades Caterpillar, Strengths Not Enough To Offset Energy Exposure

While Caterpillar Inc. CAT has a strong balance sheet and a dividend yield of nearly 4%, these are not enough in the current scenario, according to BofA Securities.

The Caterpillar Analyst

Ross Gilardi downgraded Caterpillar from Buy to Neutral, while reducing the price target from $123 to $115.

The Caterpillar Thesis

Caterpillar has suspended its 2020 outlook, as have its peers, which highlights the degree of demand and supply side uncertainty due to the COVID-19 outbreak, Gilardi said in the note.

The company generates around 10% of sales directly from oil and gas, while also supplying pipe-laying equipment for construction, power generation, and diesel freight locomotives, all of which are indirectly related to energy. The analyst said Caterpillar also serves several big energy and natural resource driven economies like the Canadian oil sands.

“Our energy team is calling for a halving in the US onshore right count in 2020 and another 35% reduction in 2021. We are also seeing one major capital spending cut after another from the large E&Ps, as well as pipeline project deferrals in the midstream space,” Gilardi wrote.

Caterpillar has a strong balance sheet and healthy cash flows. He added, however, that the company’s stock has bounced back around 20% from recent lows, leaving little upside.

CAT Price Action

Shares of Caterpillar had declined almost 5% to $105.14 at time of publication Friday.

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