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Shares of Caterpillar Inc. turned higher in morning trading Monday, in the face of a sharp selloff in the broader stock market, after Stifel Nicolaus analyst Stanley Elliott turned bullish on the maker of construction and mining equipment, citing improved valuation, expectations of limited earnings downside and a relatively high dividend yield.
Elliott raised his rating to buy, after being at hold since at least December 2016. He trimmed his stock price target to $137, which was 35% above current levels, from $140.
The stock CAT, +6.15% rallied 2.1% in morning trading, erasing an earlier loss of as much as 11.2%. At the intraday low of $88.50, the stock was on track for its lowest close since November 2016.
Caterpillar was the best performer of the Dow Jones Industrial Average’s DJIA, -6.84% components on Monday, as the Dow tumbled 1,635 points, or 7.1%, on growing concerns that the COVID-19 pandemic will cause a global recession.
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Elliott said while he believes 2020 will be a “difficult” year for Caterpillar, given the COVID-19 pandemic, oil and gas disruptions and underproduction to better align dealer inventory levels, he believes the recent decline in Caterpillar’s stock has created an “attractive entry point.”
He said much of the bad news for the year has been “pulled forward” and are now priced into the stock.
“While we are reluctant to call a bottom in the shares near term and think the broader market will remain volatile, we see a business that has structurally improved its earnings and cash flow profiles,” Elliott wrote in a note to clients. “The combination of the two should limit earnings downside versus prior cycles and the improved cash flows should help investors balance an improved risk-reward profile.”
Through Friday, Caterpillar shares had tumbled 28.7% over the past month, while the Dow had dropped 21.2%.
The stock’s current quarterly dividend of $1.03 a share implies a dividend yield of 4.05%, which compares with the yield on the SPDR Industrial Select Sector exchange-traded fund XLI, -5.69% of 2.69% and the implied yield on the S&P 500 index SPX, -6.36% of 2.39%.
Elliott said Caterpillar’s current yield is well above the 20-year average of about 2.6%.
“History has shown that a 4% yield has been historically supportive of the shares and proved to be an opportune time to buy the shares,” Elliott wrote.
