Goldman Sachs Turns Cautious On Machinery Stocks

The machinery cycle may be taking a turn for the worse, and one Wall Street analyst has adjusted his ratings on a handful of related stocks.

The Analyst

Goldman Sachs analyst Jerry Revich has made the following changes to his outlook:

• Reiterated Buy rating for Caterpillar Inc. CAT but lowered price target from $221 to $182 and removed stock from Conviction Buy List.
• Reiterated Buy rating for Deere & Company DE but lowered price target from $213 to $175 and removed stock from Conviction Buy List.
• Downgraded Manitowoc Company Inc MTW from Neutral to Sell and lowered price target from $30 to $22.
• Downgraded Generac Holdings Inc. GNRC from Neutral to Sell and reiterated $45 price target.

The Thesis

According to Revich, the environment for machinery stocks has deteriorated significantly in 2018.

“Macro data points are now mixed compared to our earlier view, including weaker crop prices, risk of further input cost inflation (China components account for up to 5% of machinery content), NTN reported slowing bearing orders, and risk of further trade war escalation,” Revich said in the downgrade note.

Revich still sees value in both Caterpillar and Deere, but input cost inflation and declining lead times for suppliers are troubling signs. For Manitowoc, Revich says organic growth in the crane business likely peaked in Q2. Revich says organic revenue growth for Generac will slow in the second half of 2018, and the stock is already trading at the high end of hits historical earnings multiple range.

Price Action

Here’s how the impacted stocks were trading on Tuesday:

• Generac closed down 3.7 percent.
• Manitowoc down 3.6 percent.
• Deere was up 1.3 percent.
• Caterpillar was up 0.6 percent.

Related Links:

A Trade War Primer: The Tariffs Imposed, Threatened, And Expected By The US, Canada, Mexico, China And The EU

Bank Of America Lowers Industrial Machinery Price Targets Across The Board