Caterpillar, Inc. (CAT): Tug-of-war story appears moderately over-bought - Goldman Sach - April 21, 2008
What's changed
We are raising 2008-2010 EPS for CAT to $5.85/$6.60/$7.75 from $5.70/ $6.50/$7.35 on
(1) stronger 1Q2008 reported EPS ($1.45, with recurring EPS in line at $1.37 vs. $1.38 GS ex-asset sale gain),
(2) favorable FX and buyback, and
(3) slightly higher CAT Financial income (due to lower rates), with
(4) higher engine margins offset by lower Machines margins.
We are also raising our six-month price target to $79 (13.5X 2008 P/E) from $66 (11.5X 2008 P/E) due to a higher valuation assigned to CAT’s mining business (~30% of profit), in line with recent changes we made for BUCY and JOYG. Downside potential of 7% is implied by our new target. We believe 2Q2008 consensus EPS is beatable (GS $1.54 vs. $1.41 previously and $1.50 consensus), but we remain concerned about raw material and margin pressures in 2H2008, where consensus now appears aggressive.
Implications
We view CAT as a “tug-of-war” story between weakening construction equipment markets in North America and Western Europe and strong global mining and oil and gas markets, with currency also a net positive (we believe a weak dollar benefit for volume, price and revenue translation trump the impact from cost translation). We think the risk/reward is moderately unfavorable near term, with profit-taking following positive options expiry activity on Friday likely, in our view. Manufacturing productivity (CPS) and cost/price balance in 2H2008/2009 are longer-term unknowns that keep us in “show me” mode, but a more negative stance near term given upside potential to 2Q2008 consensus is difficult to justify.
Valuation
CAT is at 14.5X/13X 2008-2009 P/E, +5%/-8% vs. its historical average.
Key risks
Rising raw materials pressures and challenge of raising prices to offset in the face of softer US/Western Europe construction markets, and policy of not raising prices on business (e.g., mining) already in backlog. |
