Tags: caterpillar | stock | shares | rise | recession

Barron's: Caterpillar Stock Could Rise in Downturn

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By    |   Wednesday, 27 February 2019 02:45 PM

Caterpillar Inc. shares might still be a good buy for investors since it stands to rally in an economic downturn despite the stock being downgraded by two notches to sell from buy at UBS on Tuesday.

Caterpillar said Tuesday it expects more than half of the company’s end markets to “peak” in 2019, “pressuring revenue and margins in 2020 as demand declines.” It also cut its price target to $125 from $154.

Shares of the Dow component (CAT) were up $1.30 or 1 percent, at $139.29 in late Wednesday trading Caterpillar on Tuesday fell 4.3 percent, though it remains up more than 20 percent from a low in October.

UBS analyst Steven Fisher cited concerns about Caterpillar’s construction business and its energy and transportation (E&T) division, Bloomberg reported. He sees construction sales falling 8 percent in 2020, “driven by lower demand” in multiple major geographic regions, including North America and China. E&T sales are seen falling 5 percent, “driven by a slowdown in pipeline capex.”

UBS expects Caterpillar’s 2020 earnings to fall 8 percent from 2019 “as continued growth in mining and buybacks will not be enough to offset headwinds in construction and oil & gas.” The firm cut its earnings estimates for both 2020 and 2021.

These earnings declines, Fisher wrote, were not priced into the stock, and “we expect downward earnings revisions to pressure the stock over the next 12 months.”

UBS stands as only one of two firms with a sell rating on Caterpillar, according to Bloomberg data. Eighteen firms have a buy rating on it and 10 view it as a hold. The average price target is $149, which is roughly 9 percent above current levels.

Meanwhile, Barron's explained that "figuring out what to pay for economically sensitive companies isn’t a new problem. It’s always a good idea to buy high-quality companies at a discount."

Barron's said that "valuing long-cycle, machinery makers can be difficult. Caterpillar trades for just 11 times estimated 2019 earnings. Is that a good value for shares, with the price/earnings multiple 40% below the company’s five-year historical average? Or, as is the case with many economically sensitive companies, is a low valuation multiple the market’s way of warning investors that the earnings will fall steeply in the near future?

"What makes this question more difficult is the fact that no one really knows what a normal recession is anymore. The financial crisis wasn’t a normal recession. It was the most severe economic downturn since the Great Depression. People may not remember the Great Depression, but today’s analysts may lack first-person experience of more-recent market turmoil," Barron's said.

The financial newspaper said "that’s what Barron’s thinks is the situation with Caterpillar. We made the company’s stock one of our top picks for 2019."

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Caterpillar Inc. shares might still be a good buy for investors since it stands to rally in an economic downturn despite the stock being downgraded by two notches to sell from buy at UBS on Tuesday.
caterpillar, stock, shares, rise, recession
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2019-45-27
Wednesday, 27 February 2019 02:45 PM
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