KUBTY - Caterpillar: Material Downside To Consensus Estimates

2024-06-18 15:07:58 ET

Summary

• Historical downcycles for Caterpillar have lasted 3-7 quarters with average drawdowns of ~32% while consensus currently models flat YoY revenue for 24E.
• I see material downside to consensus as US construction activity normalizes, driven by weak recent billings and a restricting rate environment.
• Despite macro pressure, CAT is in a much stronger shape than during the last downcycle which should protect margins and ROCE. Buybacks to also support EPS by ~7% through 26E.
• With substantial downside risk I see an unfavorable risk/reward at current prices and initiate shares at Underweight and a YE24 price target of $280/sh.

Caterpillar ( CAT ) is the premier global manufacturer of heavy machinery, making its topline highly sensitive to US and global macros, particularly in construction and mining. With the market expecting roughly flat sales for 24E/25E, I see downside potential to consensus, driven by an inflecting construction cycle, lowering capex in mining and a potential "higher for longer" rate environment. Downcycles for CAT have historically lasted 3-7 quarters, with average peak-to-trough sales declines of ~32%. Following initial negative quarterly sales growth in Q1, I estimate further weakening sales, potentially troughing by early-mid 25E. Lack of 2024 rate cuts could be a key downside catalyst, with interest rates historically correlated to US construction activity....

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