Please ensure Javascript is enabled for purposes of website accessibility

Analyst Upgrades Caterpillar Stock to Buy Despite Coronavirus Fears

By Neha Chamaria - Mar 16, 2020 at 3:27PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Stifel sees value in Caterpillar stock, but it's too early to make such a call given the coronavirus global trade slowdown, crashing oil prices, and other headwinds.

Caterpillar (CAT 1.95%) stock just got upgraded. Yes, you read that right. At a time when the COVID-19 outbreak is causing a market meltdown, raising fears of a recession, and triggering frenzied stock downgrades across industries, investment bank Stifel Nicolaus has taken an exception and upgraded Caterpillar's stock rating from a "hold" to a "buy."

Why Stifel sees value in Caterpillar stock

To be fair, Stifel isn't calling a bottom on Caterpillar shares yet, but it has turned bullish on the blue chip stock. When Stifel rates a stock a "buy," it typically expects the stock to outperform the S&P 500 and generate total returns of at least 15% over the next 12-18 months.

Stifel analyst Stanley Elliot points to Caterpillar's history and believes the "business has structurally improved its earnings and cash flow profiles," which should help Caterpillar "limit downside earnings versus previous cycles."

Post-it Notes saying right, wrong, yes, no.

Image source: Getty Images.

In other words, Elliot believes Caterpillar's bottom line may not be hit as hard this time around as in previous down cycles. Elliot further noted that the recent  stabilization, even growth, in some of Caterpillar's end markets, combined with management's ongoing cost reduction efforts, should help the company's earnings bounce back faster as the market recovers from the coronavirus shock. Elliot also suggested that Caterpillar shares have historically found a support around dividend yields of 4%. That's what the stock is currently yielding. 

Stifel's points are validated to a certain extent. 2019 was a pretty strong year for Caterpillar compared to recent years, with its revenues sliding only 2% to $53.8 billion and adjusted earnings 1% to $11.06 per share. The company also reported a healthy growth in cash flows and increased dividend by 20%.

Caterpillar's headwinds are growing by the day 

I believe it's too early to make a buy call given the massive headwinds facing Caterpillar. Caterpillar has lots of moving parts, and the coronavirus pandemic has only added fuel to the fire.

Consider Caterpillar's own key end-market assumptions  for each of its three segments for 2020:

  • Construction industries: Declining residential and non-residential construction in North America, slowing growth in Europe, a flat to down market in China, slow recovery in Brazil.
  • Resource industries (primarily mining): Mid-single digit growth in North American mining but miners still cautious about capital spending.
  • Energy & transportation: Weakness in North American on-shore drilling market, flat to low growth in solar, lower industrial demand, and modest growth in transportation and power. 

There's not much to like here. CEO Jim Umpleby  expects "continued global economic uncertainty to pressure sales to users in 2020 and cause dealers to further reduce inventories" and expects adjusted earnings of only $8.50-$10 per share in 2020. 

Global slowdown especially in China, the coronavirus shutdown impact on key sectors like transportation, and the tumbling oil prices that could put oil and gas spending in limbo all bode ill for Caterpillar. Moreover, I strongly believe Caterpillar's retail machinery sales statistics reveal a lot about its end markets -- going by the latest numbers, I'd take Stifel's advice with a grain of salt. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Caterpillar Inc. Stock Quote
Caterpillar Inc.
CAT
$217.14 (1.95%) $4.15

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
344%
 
S&P 500 Returns
120%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.