Morgan Stanley On Caterpillar And United Rental's Stock: 'Time To Leave'

Construction-focused companies Caterpillar Inc. CAT and United Rentals, Inc. URI have some of the highest exposure rates to U.S. non-residential construction, which is likely to enter a multi-year downturn cycle due to the coronavirus, according to Morgan Stanley.

The Analyst

Courtney Yakavonis downgraded Caterpillar's stock rating from Equal-Weight to Underweight with a price target lowered from $107 to $93.

The analyst also downgraded United Rentals from Overweight to Equal-Weight with a price target lowered from $154 to $110.

The Thesis

The U.S. non-residential construction cycle is likely to be more protracted than previously expected, driven by declines across Commercial, Office, Amusement/Recreation and Lodging construction in addition to state and local budget cuts, Yakavonis wrote in the notes. United Rentals' exposure to the segment stands at 44% while Caterpillar's exposure is at 22%.

Yakavonis said Public and Private non-residential construction spends are likely to fall 10% year-over-year in 2020 and another 7% in 2021. The math behind these estimates points to a $400 billion shortfall over three years. But even if an infrastructure stimulus project is announced and/or incremental state and local aid, it will likely still fall short of offsetting the $400 billion shortfalls.

Meanwhile, consensus estimates factors in a "robust" 6% to 9% sales recovery in both companies in 2021 but the research firm's estimates point to a different outlook. Specifically, the research firm's 2021 EPS estimates for Caterpillar are 35% below the consensus estimate while its 2021 EBITDA estimates are 14% below estimates for United Rentals.