Morgan Stanley on Caterpillar (CAT): 'We expect a positive stock reaction'
Morgan Stanley analyst Angel Castillo reiterated an Equalweight rating and $270.00 price target on Caterpillar (NYSE: CAT)
The analyst comments "We expect a positive stock reaction to CAT's 4Q23 EPS beat and full year 2024 outlook and commentary that was in line with consensus but better than we think investors feared. CAT reported 4Q23 adjusted EPS of $5.23 versus MSe of $4.93 and consensus estimate of $4.79. Relative to our estimates, the beat was due to stronger Energy & Transportation adjusted operating income (+$233M), partly offset by softer Construction Industries adjusted operating income (-$85M) and Resource Industries adjusted operating income (-$32M). CAT dealer inventories decreased ~$0.9B in 4Q23 vs. 3Q23 (and vs. a ~$0.7B re-stock in 4Q22), resulting in a ~$1.6BM YoY revenue headwind. The company's order backlog decreased by $0.6B sequentially in 4Q23, and compares with a decrease of $2.6B QoQ in 3Q23 and a decrease of $3.0B YoY in 4Q22. Overall a good quarter and an even better outlook including several material positives: i) provided a sales outlook that met consensus expectations – 2024 full year sales and revenues expected to be "broadly similar to 2023;" ii) raised the top end of their adjusted operating profit margin target range by 100bps – this is particularly important given that bears' thesis rested on margins being unsustainable at current levels. CAT doubled down on this by guiding to 2024 adjusted operating profit margin at the top half of the corresponding level of sales and revenues; iii) raised ME&T FCF target range to $5-10bn (previously $4-8bn) and equally guided to the top half of the updated range; and iv) noted that it does not expect significant change to machine dealer inventories by end of 2024 – this is an important point, because combined with the company's sales guidance, it suggests CAT is not expecting a material slowdown in demand, contrary to our own expectations and bears fears. Ultimately, we think it may still be too early to ring the "all clear" bell. Notwithstanding, we have seen stocks react positively and short squeeze on similar earnings results this quarter, something we think is likely for CAT shares as well. See Exhibit 1 inside for more details on 4Q23 actuals vs. estimates."
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Shares of Caterpillar closed at $315.09 yesterday.