Freedonia Group: UBS' Downgrade of Caterpillar Paints an Incomplete Picture

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Mar 01, 2019, 10:42 ET

CLEVELAND, March 1, 2019 /PRNewswire/ -- On February 26^th 2019, UBS downgraded Caterpillar investment rating two notches, moving from buy to sell. The company's stock tumbled and other analysts began to reconsider their outlook for Caterpillar because of the well-publicized downgrade.

UBS expects Caterpillar profits to peak in 2019. In a research note, UBS' Steven Fisher wrote, "We believe many of [Caterpillar's] key end markets, notably North American construction, China construction, and oil and gas are approaching peak demand levels in 2019 and will roll over in 2020." Fisher argued "that investors have yet to account for cyclical pressure and a possible earnings decline in 2020", "forecasting a roughly 8 per cent drop in earnings per share in 2020."

What the Downgrade Gets Wrong

According to Freedonia's Gleb Mytko, "UBS' downgrade overlooks a number of Caterpillar's strengths and minimizes other key considerations, painting an unnecessarily gloomy picture that does not fully recognize the company's strong financial standing and long-term growth potential." Attesting to its profitability and the success of recent reforms, Caterpillar's revenues are up by more than $16 billion since 2016, reaching levels in 2018 not seen since 2014.

Caterpillar is currently in the final stages of its comprehensive restructuring plan, launched in 2015. By closing production facilities, reducing its labor force, and streamlining its distribution and administration operations through consolidation, Caterpillar lowered its production costs and boosted the efficiency of its operations. The restructuring plan also helped increase its profitability and competitiveness, and made the company more nimble, positioning it for long-term success. Today, Caterpillar is better able to cope with weaker conditions in the off-road equipment market than many of its competitors.

Caterpillar's heavy investment in technological innovation is also key to both the company's short- and long-term success. The introduction of new off-road equipment featuring advanced technologies will continue to spur interest in Caterpillar's products, helping it gain market share around the world and weather periods of weakness. Technological innovation has allowed Caterpillar to also broaden its customer base.

Looking Beyond the Stock Price

UBS downgrade is exclusively focused on the near-term and focuses on factors outside of Caterpillar's control, failing to fully take into account the company's strengths and growth potential. It also doesn't fully recognize the impact of Caterpillar's restructuring plan and its numerous partnerships with other companies and institutions, and minimizes the positive outlook for its mining business and opportunities in smaller markets, such as agriculture, forestry, and utilities.

Opportunities in Mining

While Freedonia's economists concur that the global construction sector will slow, the outlook for the global mining sector for 2020 and 2021 is quite strong, and associated demand for off-road equipment is expected to grow. In addition to boosting Caterpillar's mining equipment sales, the expansion of the global mining sector will also stimulate demand for numerous products manufactured by its Construction Industries business, such as loaders and excavators. The ongoing shift toward partly- and fully-automated mining equipment, and other advanced mining technologies will continue to drive global demand for Caterpillar's products, leading to an improvement in the company's market position.

For more information, see Freedonia's Global Mining Equipment study:

https://www.freedoniagroup.com/industry-study/global-mining-equipment-3629.htm

Forecasts for the years 2019 and 2023 will be included in the new report Global Off-Road Equipment Technology 2019 scheduled to be published next week.

About The Freedonia Group – The Freedonia Group, a division of MarketResearch.com, is a leading international industrial research company publishing more than 100 studies annually. Since 1985 we have provided research to customers ranging in size from global conglomerates to one-person consulting firms. More than 90% of the industrial companies in the Fortune 500 use Freedonia Group research to help with their strategic planning. Each study includes product and market analyses and forecasts, in-depth discussions of important industry trends, and market share information. Studies can be purchased at www.freedoniagroup.com and are also available on www.marketresearch.com and www.profound.com.

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SOURCE The Freedonia Group