Deutsche Bank Starts Caterpillar (CAT) at Buy
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Deutsche Bank initiated coverage on Caterpillar (NYSE: CAT) with a Buy rating and a price target of $98, implying upside of 21%. Analsyt Nicole DeBlase thinks 2016 represents the cyclical trough for EPS.
"We do believe that 64% of CAT’s revenue is (finally) reaching bottom (73% is below mid-cycle), as natural resource CapEx approaches cyclical lows. We do not embed a V-shaped recovery into our model by any means, but we do see scope for a positive inflection in mining A/M, well servicing, and Brazil construction in 2017e," said DeBlase.
The analsyt added, "Despite a muted medium-term volume outlook (DB: +4% organic in 2017e), our 2017e EPS estimate of $4.03 sits 13% above consensus, as we believe the Street is underestimating cost cutting benefits. We commend management for spending $2.25bn on restructuring over 2013-16e vs. just $0.6bn in 2009 and nothing two downturns ago. As per CAT, these cuts have been structural rather than temporary, and so even in an environment of modest volume growth, we believe the company can grow EPS 15% Y/Y, driven predominately by a narrowing loss within Resource (-$86m in 2017e vs. -$452m in 2016e) driven entirely by restructuring payback. Moreover, once a recovery materializes, CAT’s incremental margins should improve to 30% vs. 10% and 23% during 2003-08 and 2010-12, respectively."
Shares of Caterpillar closed at $81.69 yesterday.
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