Barclays Constructs A Bullish Call On Caterpillar, CNH Industrial And Others

The American machinery and construction industry is likely to see better times ahead, according to Barclays. The firm initiated coverage of the sector with a Positive outlook.

"Coming off several once-in-a-100-years cycles, the sales bases are the low, the political rhetoric is high and the risk-reward is still skewed positive despite the market run," analyst Adam Seiden said in a note.

Seiden initiated coverage of 18 companies with a Positive view.

"We believe the earnings, the denominator in P/E, will keep valuations attractive within the normalized 10-20x framework," he said in a Wednesday note.

The analyst expects the companies in his coverage universe to grow over the next two to three years, with investors willing to put a higher multiple on that growth. The about-face in investor sentiment toward the machinery space is mostly attributable to Washington and the prospect for tax reform, the analyst said.

Looking at macro and micro data pertaining to the industry, Barclays said GDP, PMI and manufacturing demand all have improved, while retail sales at Caterpillar Inc. CAT and Deere & Company DE have also progressed.

Among other metrics, the firm said:

Inventories are in-line.
Used equipment values in U.S. agricultural and construction sectors are either stable or slowly rising.
Units and horsepower are converging.
Mining equipment sales are up 80 percent year-over-year in the third quarter.
Global infrastructure demand is turning favorable for heavy equipment.