Caterpillar (CAT) Cut to Sell at Goldman Sachs Amid Structural Shift in Global Infrastructure Capex

(Updated - January 25, 2016 9:07 AM EST)

Goldman Sachs downgraded Caterpillar (NYSE: CAT) from Neutral to Sell with a price target of $51.00 (from $67.00), suggesting downside of 16%. Analyst Jerry Revich expects "right-sizing" of commodity capex given the extended commodity infrastructure downturn.

"We have been Cautious on Machinery since July, with Sells on stocks with significant leverage and challenged returns (NAV, JOY, KBR, JEC). We are clearly not early on CAT, but our 2017 EPS is now 15% below consensus and our company and country-level commodity reinvestment analysis suggests capex in CAT’s primary end markets is above mid-cycle levels, in contrast to consensus expectations of a 2016 EPS bottom," said Revich.

The analyst noted several catalysts:

"1) We see a sustained right-sizing of commodity capex allocation in this cycle due to challenging producer returns and balance sheets – factors that we expect to drive lower cycle over cycle machinery demand and utilization.

2) Structurally lower returns on capital driven by excess capacity. For CAT, our 2017E CROCI forecast of 9% is below a 20-year average of 11% due to meaningful excess supply – asset turns are 20% lower – while EBITDA margins of 13% are still modestly above the average.

3) Commodity over-supply to drive sustained capex shift (30% of CAT sales). Commodity producers are still completing long-lead time projects from the last cycle, driving elevated reinvestment rates through 2017.

4) Shift lower for machinery demand in commodity export countries (25% of CAT sales). We see accelerating deterioration in machinery sales to commodity export countries driven by declining direct commodity capex and a broader slowdown in government and private investment."

For an analyst ratings summary and ratings history on Caterpillar click here. For more ratings news on Caterpillar click here.

Shares of Caterpillar closed at $60.98 yesterday.

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