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UBS analysts downgraded Caterpillar (NYSE:CAT) to Neutral from Buy, raising the price target to $230 from $225.
The analysts explained that UBS views the company’s risk-reward as more balanced following the margin rebound.
“Our thesis on positive margin inflection is playing out,” said the analysts, who added that they continue to see a positive trajectory for margins and earnings growth from here.
“With multiples compressing as interest rates rise, the valuation at this time presents a more balanced risk-reward dynamic in our view. CAT posted 280bps of segment-level margin expansion YoY in Q3 on ~11% volume growth, and guided to q/q improvement in margins in Q4. Although we continue to have a positive overall view on the company’s end markets that support demand and pricing, there is more variability of demand trajectory in some of the markets relative to a year ago (i.e. softening residential construction, Europe),” they wrote.
They added that while production cost increases should become less of a headwind, and oil and gas are better than a year ago, they have tried to factor those points into their model.
“We expect sales and margins to grow through 2024, and we are ~4% ahead of 2024 consensus EPS, but the recent move in the stock has narrowed the upside. We expect continued solid results to support the stock as it moves towards our target. Should the stock retreat without a significant shift in the fundamentals, we would be inclined to revisit our rating,” the analysts concluded.
Caterpillar shares fell 1% Monday.
