Goldman Sachs Shifts Bullish View from Construction to Machinery; Cummins (CMI), Caterpillar (CAT) Upgraded; Martin Marietta (MLM), Summit (SUM), KBR (KBR) Downgraded
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(Updated - October 11, 2016 8:37 AM EDT)
Goldman Sachs raised its machinery coverage view to Attractive and upgraded Cummins (NYSE: CMI) from Neutral to Conviction Buy with a price target of $162.00 (from $134.00). Caterpillar (NYSE: CAT) was raised to Buy with a price target of $112.
The bank's coverage view on construction was lowered to neutral and Martin Marietta Materials (NYSE: MLM) and Summit Materials (NYSE: SUM) were downgraded to Neutral, while KBR, Inc. (NYSE: KBR) was cut to Sell with a price target of $15.
Analyst Jerry Revich thinks the pace of recovery is slowing in construction. On the other hand, he thinks key machinery end markets are bottoming.
"While we remain positive on a continued US construction recovery, the pace of the recovery is slowing, and we see rising risk in the private nonres vertical where greenfield chemicals and LNG investment is at peak. In contrast, we believe key Machinery end markets are bottoming while manufacturing restructuring is likely to drive structurally higher margins for CAT, CMI, DE, TEX," said Revich.
"We upgrade CAT and CMI to Buy and add CMI to the CL as we see structurally higher margins in this cycle. For CAT, we estimate $8 in mid-cycle EPS driven by (1) Construction Industries European footprint reduction and product line expansion, (2) Resources footprint & product consolidation, and (3) R&D reduction and capital allocation toward high-return product lines. For CMI, we estimate $11.50 in mid-cycle EPS. CMI’s margins are well above prior trough amid a bottoming for its core end markets (US & Brazil truck, Power Gen, Mining & Energy), with further potential upside from Power Systems manufacturing restructuring in 2018," added the analyst.
Discussing Martin Marietta and Summit Materials, the analyst said, "We downgrade MLM and SUM to Neutral as we see slowing growth in the 4th year of the construction recovery amid broadly positive investor sentiment."
On KBR, Revich said, "We believe KBR will be challenged to grow earnings amid an energy & mining capex recovery due to its outsized exposure to core LNG and greenfield ammonia capex cycles (35-40% of EBIT) which are in the early stages of decline. US brownfield LNG projects have been awarded and KBR is set to complete its work on Australia LNG projects by 2018."
Shares of Cummins closed at $128.17 yesterday.
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