Shares of Caterpillar (CAT) dropped in morning trading after the heavy equipment maker was downgraded to Sell at UBS, which predicted that the majority of the company's end markets will peak this year, and that revenue and margins will come under pressure in 2020 as demand declines.
CATERPILLAR'S DOUBLE DOWNGRADE: UBS analyst Steven Fisher downgraded Caterpillar two notches, to Sell from Buy, and lowered his price target to $125 from $154. In a research note to investors, Fisher said he believes that about 55% of Caterpillar's end markets will peak in 2019, pressuring revenue and margins in 2020 as demand declines. "We expect 2020 EPS to decline 8% YoY, as continued growth in mining and buybacks will not be enough to offset headwinds in construction and oil & gas," Fisher said. Consensus earnings estimates, which imply 8% year-over-year earnings growth in 2020, are 16% too high, he contended, adding that he expects downward earnings revisions to pressure Caterpillar shares over the next 12 months. He sees construction sales falling 8% in 2020, "driven by lower demand" in multiple major geographic regions, including North America, China and EMEA, and said Energy & Transportation sales are seen falling 5%, "driven by a slowdown in pipeline capex."
WHAT'S NOTABLE: Caterpillar shares have declined amid a face off between the U.S. and China on tariffs. Additionally, according to a report last week from Bloomberg's Jonathan Stearns and Irina Vilcu, Caterpillar trucks are among U.S. goods that would face retaliatory European Union tariffs should President Donald Trump follow through on a threat to impose automotive duties against the bloc.Trump is threatening tariffs of up to 25% on imported European autos and auto parts. "Caterpillar competes best in a free trade environment," the company said in a statement to CNBC last week. "This situation continues to be very fluid and we are actively engaged in the discussions. We are hopeful that the government leaders can work toward a positive outcome for all parties."
Caterpillar reported disappointing earnings on January 28, with adjusted earnings per share of $2.55 for the fourth quarter falling well short of the $2.99 consensus. Looking ahead, the company forecast fiscal 2019 EPS of $11.75-$12.75. At the time, analysts had expected FY19 EPS of $12.64, but the consensus has since ticked lower to $12.30. "Our outlook assumes a modest sales increase based on the fundamentals of our diverse end markets as well as the macroeconomic and geopolitical environment,” Chief Executive Officer Jim Umpleby said in a statement. In September, Caterpillar said it sales had not suffered from tariffs, but said it was facing higher raw material costs.
PRICE ACTION: In morning trading, shares of Caterpillar are down 2.4% to $137.99.
