Analysts at UBS have reiterated their ‘Sell’ rating on Caterpillar in anticipation of a slowdown in the company’s growth ahead that has not been priced into the stock.
In a note to clients following Caterpillar’s second quarter results, which topped Wall Street expectations on both sales and profit, the analysts wrote that the company has benefitted in recent quarters from outsized absorption as the supply chain improves, and price versus cost driving strong margins.
“We expect those benefits to fade as CAT works through its backlog and returns to more normal production, and hits tougher price versus cost comparisons in the second half of 2023,” they wrote.
They noted that these tough comparisons will lower expectations of Caterpillar’s growth potential, especially in a more variable demand environment, and that its stock historically trades with growth.
“We expect growth in some markets to be mitigated by softness in other markets, and we expect margins to flatten as some volume leverage is mitigated by higher net costs,” they wrote.
“As the market discounts this growth trajectory, we expect the stock to trend lower. Upside risks would be a quick recovery in China, Europe, and US oil & gas production.”
To reflect stronger growth in construction and resource industries, the analysts raised their 2023, 2024 and 2025 earnings per share (EPS) estimates for Caterpillar to $19.25, $20.50, and $22 from $17.25, $17.30, and $17.65 respectively.
“We expect EPS to peak in 2025 at $22, helped by buybacks,” they wrote.
They also raised their price target on the stock to US$220 from US$208 to reflect a lower multiple on higher earnings.
“Our price target reflects a 10.8 times price-to-earnings ratio (P/E) on our 2024 EPS estimate of $20,50, previously 12 times $17.30,” they explained.
Caterpillar shares traded hands at $283.18 on Thursday afternoon.
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