Caterpillar Rating Cut as Challenges Outweigh Improvements

Caterpillar's improvements will be overwhelmed by customer budget problems and stretched government dollars, BMO Capital says.
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Caterpillar's  (CAT) - Get Report customers' budget problems and stretched government finances will likely overwhelm the heavy-equipment company's internal improvements, said a BMO Capital analyst, who downgraded the shares to market perform from outperform.

Shares of the Deerfield, Ill., company at last check were up 2.4% to $124.52.

In a note to clients entitled "A Catatonic Recovery," analyst Joel Tiss said Caterpillar's long-term recovery for its end markets "will be somewhat challenged by customers' budgetary constraints and government finances being stretched."

"These factors will likely overwhelm the myriad internal improvements occurring at the company, at least for the next few years," said Tiss, who affirmed his price target at $130.

In April, Caterpillar posted weaker-than-expected adjusted earnings for the first quarter and cautioned that the coronavirus pandemic would continue to hurt its operations for the rest of the year.

Tiss said the bulk of the company's customers aim to squeeze out additional production without incremental capital outlays. 

"We sense that private and public spending on construction will broadly remain anemic this year," the analyst said. 

"Elsewhere, many of Caterpillar's energy customers are being affected by weak financial positions, while mining companies' investors are clamoring for a return of capital versus aggressive investments in new projects and machinery."

With this setup, Tiss added, "it is hard to imagine a robust surge in the near term."

In addition, Tiss said Caterpillar's "large exposures to coal and copper commodities might keep spending subdued for some time."

Due to the fall in demand from the coronavirus pandemic, the analyst said, "Caterpillar is working to cut deeper into discretionary expenses, temporarily curtail certain capital expenditures, and make the company's cost structure more flexible."

"As a result, we believe the company is better positioned to withstand a downturn compared with before," Tiss said.