UBS Analyst Reiterates Sell Rating On Caterpillar

UBS Analyst Reiterates Sell Rating On Caterpillar
April 5, 2019


UBS analyst Steven Fisher issued a bearish report on the stock of Caterpillar (NYSE: CAT) yesterday and reaffirmed his ‘sell’ rating. However, the market discarded the gloomy news from UBS that discusses the negative effect of declining demand for construction equipment in China. Despite the positive close ($140.13, +0.62%), Caterpillar stock has dropped nearly 1.8% over the past year. With gains of roughly 10.5%, this year has been good for the stock.

Like many industrial stocks, Caterpillar was also trapped in the US-China trade war mishaps of 2018, as investors were worried that import duties would soften global economic growth and particularly impact the world’s second largest economy, the company’s key market.

Yesterday, Steven Fisher of UBS reaffirmed a “sell” rating on the stock of Caterpillar and issued a price target of $125.  According to Fisher, the universal rule that applies to all sectors, i.e., “what goes up must come down” applies to the Chinese construction market as well.

Following Fisher’s latest trip to China, the analyst had a favorable opinion of the company’s infrastructure and construction expenditure, which in the past few months has resulted in higher-than-expected sales of construction machinery. That makes him bullish about Caterpillar’s growth prospects in the region for 2019. But the great times cannot continue forever, he warns. Fisher believes that the peak is not far away. Fisher anticipates that Caterpillar’s construction equipment generated over 50% of previous year’s sales from China. So, it’s no surprise that he believes a nationwide downturn will push the stock down. If the world economy slows faster than anticipated, or if China’s economy makes an unexpected retracement, it is evident that Caterpillar will not be immune.

With excavator sales in China at record highs, Fisher anticipates “softening replacement demand in 2020. We also expect weaker pricing based on competitive dynamics.”

Fisher is not the only analyst with a bearish view of the company. Analysts at Deutsche Bank slashed their rating on the stock two days previously, amid worries that the mining and construction equipment maker’s order book could record negative growth in the months ahead as the global economy slows down. Notably, Caterpillar’s order backlog was $16.5 billion at the end of 4Q18, down $800 million from the prior quarter. However, the record book has registered an increase of roughly $700 million from the end of 2017.

Based on the concerns above, Deutsche Bank analyst Chad Dillard slashed his rating to “hold” from “buy.” Dillard also issued a price target of $128 for the stock. The analyst opined that if the growth in the order backlog turns negative, then it “normally precedes a negative earnings revision cycle by around three months.”

In a note to clients, Dillard wrote “Synchronized global growth has collapsed, the China Land Cycle is rolling over (and will continue to weaken despite the single positive data point this week). Europe is slowing more than expected, and the US is over-saturated with construction equipment.”

Caterpillar forecasts FY19 earnings to range between $11.75 and $12.75 per share, versus Refinitiv consensus view of $12.73 per share.

Although the stock is still prone to economic concerns, they have also become reasonably inexpensive, and some analysts see more constructive catalysts in the offing. Even though the shares have mostly been lagging behind the wider market in 2019, they managed to hold up well than they did in 2018, and news of US-China trade agreement should only take them to a higher orbit.

As the company is yet to see a downturn, the report may not have a significant impact on the stock price. However, fundamentally, the stock will remain range bound until the US-China trade deal gets finalized.

Technically, the stock is trading above its 50-day moving average. The MACD indicator also has a positive reading. As a result, we can expect the stock to move up in the short-term. However, the uptrend may be limited due to the presence of strong technical resistance at 155 levels.

cat - technical analysis - 5th April 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.


Andrew Wright

Prior to founding in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

Related Articles

Euro Rises on ECB’s Reluctance to Announce Further Easing

  In the days that followed the Brexit referendum, the Euro dollar plunged against the Norwegian Krona. The EURNOK pair

Aussie Weakens on Low Commodity Prices

  The Aussie performed poorly last year, losing 10% against the US dollar. Things have hardly changed so far this

IMF Downgrades Australia Growth Outlook

  Poor retail sales and lower-than-anticipated trade balance weakened the Aussie in the first week of September. The downtrend was