The shares of Caterpillar (CAT) - Get Report are dropping after Goldman Sachs downgraded the stock to Sell from Neutral. Demand for machinery will probably drop as commodity producers continue to lower their capital expenditures going forward, the firm believes.

WHAT'S NEW: Commodity producers are likely to reduce their capital spending, including their expenditures on machinery, according to Goldman analyst Jerry Revich. These trends will be driven by the producers' "challenging returns" and weak balance sheets, he believes. The commodity producers' slump will affect Caterpillar in two ways, the analyst explained. Specifically, 30% of Caterpillar's revenue is derived from commodity producers, while it obtains 25% of its revenue from countries that export commodities, where overall demand for machinery will probably fall, explained Revich. Moreover, although analysts' consensus estimates indicate that they expect Caterpillar's profit to bottom this year, capital spending in Caterpillar's main end markets appears to be above average levels, said Revich, who expects the company's 2017 EPS to come in 15% below the consensus outlook. The analyst cut his price target on the shares to $51 from $67.

PRICE ACTION: In morning trading, Caterpillar dropped 4% to $58.54. Other machinery makers also declined, with Deere (DE) - Get Report falling 2.8% to $72.54, AGCO Corporation (AGCO) - Get Report slumping 3.6% to $44.28 and Joy Global (JOY) giving back 3.2% to $8.73.

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