Goldman Sachs Raises Rating on Caterpillar (CAT) and Joy Global (JOY) to Neutral on 'Broadending' China Recovery
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(Updated - April 25, 2016 8:57 AM EDT)
Goldman Sachs raised its Machinery coverage view from Cautious to Neutral and upgraded Caterpillar (NYSE: CAT) and Joy Global (NYSE: JOY) from Sell to Neutral. Analyst Jerry Revich noted signs of a broadening China recovery, though he still sees machinery oversupply in many regions of the world.
"The breadth of the China construction recovery is broadening and with mining equipment share of total capex budgets at trough – 50% below normalized – we expect a cyclical recovery in equipment demand in 2017. Beyond the impact on direct commodity machinery (~36% of coverage sales), a cyclical commodity price recovery should translate into stabilizing to improving machinery demand in commodity export countries (~20% of sales). We now see a balanced risk-reward with upside from a normalizing in machinery share of commodity capex balanced by valuations that are at the high end of the historical range, and Machinery end markets in the Americas (63% of sales) that are over-supplied," said Revich.
Commenting on CAT and JOY upgrades, the analyst said, "Our Sells were based on our view of an extended downturn in global mining, US pipeline (CAT) and construction capex across commodity export countries (CAT). We did not anticipate a sustained China construction recovery, which has driven iron ore spot 20% higher since February, and could contribute to a recovery in machinery share of mining capex."
CAT and JOY price targets were raised to $78.00 and $24, respectively.
Shares of Caterpillar closed at $78.32 yesterday.
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