Barclays Steps To The Sidelines On Caterpillar

Caterpillar Inc. CAT reported record second-quarter results, but this prompted Barclays to downgrade the stock.

The Analyst

Barclays' Adam Seiden downgraded Caterpillar from Overweight to Equal-Weight with a price target lowered from $170 to $155.

The Thesis

The bullish case for Caterpillar was justified based on a meaningful growth profile over the years, Seiden said in a note. But the growth is now "appreciated" by the Street and there are a few reasons to drop the bullish rating exiting the second-quarter report.

• Caterpillar's biggest end-markets are no longer in a trough with some being in the mid cycle of growth and others are "above that."
• Management is looking to increase prices to offset any impact from tariffs, but this will limit the potential for margin expansion in the back half of 2018.
• Shares of Caterpillar are trading at 11 times earnings, which isn't "particularly expensive." Some of its peers like Deere & Company DE and CNH Industrial NV CNHI are trading at similar valuations, however, and are earlier in their respective market cycles.
• If trade and tariff rhetoric eases ahead of the midterm elections, crane companies and agriculture OEM's are better positioned than Caterpillar to benefit the most in machinery.
• Management's $10 billion share repurchase authorization timeline is unknown, which may be a positive but it also creates less risk for short sellers to target the stock.

Price Action

Caterpillar shares were trading higher by 2 percent Tuesday morning at $142.66.

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