Caterpillar, the world’s largest construction and mining equipment manufacturer, has been downgraded by UBS analysts from Neutral to Sell, with a new price target of $225 per share, down from $230. The downgrade comes as a result of a lack of cyclical momentum, with the analysts not seeing enough justification for the current valuation. This article will explore the reasons behind the downgrade, the expected impact on Caterpillar’s stock price, and what investors can do to mitigate the risks.
Reasons behind the downgrade:
The analysts at UBS believe that while the cycle is not over, there is not enough momentum to sustain the current valuation of Caterpillar’s stock. They point to decelerating backlog growth and flattening end market momentum in parts of construction and oil & gas. This is a worrying trend, as Caterpillar’s performance is closely tied to the health of these industries. The company recorded 27% EPS growth in 2022, but the analysts expect this to slow down to 16% this year and to just 4% in 2024, with flat growth expected in 2025.
Impact on Caterpillar’s stock price:
The downgrade by UBS has had an immediate impact on Caterpillar’s stock price, which trades over 1.6% lower in premarket Friday. The analysts believe that the multiple will compress as investors taper their growth expectations for 2024-25, leading to a downside risk for the stock. Caterpillar’s current trading multiple of 14-14.5x consensus 2024E EPS is closer to a mid-cycle than a peak multiple, indicating that investors are expecting significant growth in 2024 and beyond. However, with the decelerating backlog growth and flattening end market momentum, the analysts do not see substantial earnings growth or upward estimate revisions for 2024-25.
Mitigating risks for investors:
Investors can mitigate the risks associated with Caterpillar’s stock by diversifying their portfolios and considering alternative investment options. It is also essential to stay up-to-date with the latest news and developments related to Caterpillar and the industries it operates in. Investors should consider the outlook for construction and oil & gas industries, as they are closely tied to Caterpillar’s performance. Additionally, investors can seek the advice of financial experts and consider their risk tolerance before making any investment decisions.
The downgrade of Caterpillar’s stock by UBS analysts highlights the risks associated with investing in cyclical industries. While Caterpillar is the world’s largest construction and mining equipment manufacturer, the decelerating backlog growth and flattening end market momentum in parts of construction and oil & gas have led to a lack of cyclical momentum, which has prompted UBS to downgrade the stock. Investors should consider diversifying their portfolios, staying up-to-date with the latest news and developments, and seeking the advice of financial experts to mitigate the risks associated with investing in Caterpillar’s stock.