Heavy equipment manufacturer Caterpillar Inc. (NYSE: CAT) saw its stock being downgraded by Ross Gilardi, an analyst at Bank of America, citing clues of a huge decline in capital expenditure in the energy and mining sector. News reports indicating that the company is negotiating with banks to establish a fresh $3 billion, nine-month revolving credit facility in order to preserve capital and improve liquidity also aided the selloff. Despite the downward revision of the rating, the stock gained 2.05% or $2.34 to close at $116.48.
While acknowledging that traditionally Caterpillar’s stock is viewed as an investment opportunity during a recession, with the assumption that central banks will increase liquidity in the market through the fiscal and monetary stimulus to support the economy, the analyst believes that the strategy may not succeed this time.
In a statement to clients, Ross Gilardi said, “The traditional playbook has been to buy CAT in the depths of recession as central banks inject massive monetary and fiscal stimulus to guide a global recovery. We don’t subscribe to this theory this time. Energy and mining stocks are signaling another severe capital-spending downturn in two of CAT’s most important end markets that are as much structural as cyclical.”
Pointing to a March 31st tweet by US President Donald Trump suggesting another $2 trillion stimulus package for infrastructure in response to the COVID-19 outbreak, Gilardi stated that he does not expect another package tailor-made for infrastructure. Gilardi said, “we are not holding our breath for a federal infrastructure bill.”
The analyst also points out that the construction and mining ventures of the company reach the energy industry at several levels, even though it generates merely 10% of revenues in straightforward oil and gas transactions.
Gilardi also stated that he does not anticipate a significant improvement due to the two-decade-low natural gas prices. The analyst said: “We take limited solace in CAT’s bias towards natural gas as prices hover at 20-year lows on chronic oversupply with natural gas production projected to fall 4.4% in 2021 according to the Energy Information Administration.”
Gilardi also stated that investors feel that earnings will bottom out in the second-quarter and try to move in advance. On the basis of the arguments provided above, the analyst downgraded Caterpillar’s rating to “underperform” from “neutral” with a $115 price target.
The company, as mentioned above, is trying to increase its credit facility, with Citibank leading the talks. Other banks, which are involved in the negotiations, include Bank of America (BAC), JPMorgan Chase (JPM), and Societe Generale SA.
Gilardi trusts that Caterpillar has a strong balance sheet but forecasts that energy companies will be postponing the mining equipment replacement cycle by a few more years.
Caterpillar executives, including CEO Jim Umpleby, last week, decided to forego a base-pay rise in 2020 as a portion of the company’s attempts to reduce costs amid worldwide economic slowdown due to the pandemic. Two weeks earlier, Caterpillar withdrew its FY 2020 view and announced the termination of certain operations as there is no clarity as to when the business will rebound.
The company also affirmed that it dismissed workers at its East Peoria facility in order to trim production due to sluggish client demand.
In a memo to employees last week, Umpleby said, “We have faced and overcome many challenges during our 95-year history. Working together, I am confident we will emerge even stronger after the impact of the pandemic subsides.”
Despite the slowdown, Caterpillar has not made any change to its dividend payout of $1.03 per share for the quarter. The rate cut is expected to turn the stock range-bound with bearish bias in the short-term.
The historical price chart indicates that the stock remains range-bound between 90 and 120. While the stock is trading below its 50-day moving average, the MACD indicator has a negative reading. Therefore, we are anticipating the stock to decline in the days ahead.
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.
