The current slowdown in building activity across major markets, amid softening economic growth, is taking a toll on the construction and allied industries. Concerned about the serious impact the slump could have on Caterpillar (CAT), investment bank UBS Tuesday downgraded the company’s stock by a few notches and lowered the price target.
In an unprecedented move, the brokerage slashed Caterpillar’s stock from buy to sell, driving it sharply down in the early trading hours Tuesday. The analyst also cut the price target from $154 to as low as $125, citing the long-term headwinds facing the building industry.
The analyst cautioned that Caterpillar, a leading manufacturer of construction and mining equipment, could witness a sharp fall in demand in nearly half of its end markets next year, after peaking in the current year. And, the resultant pressure on margins and revenue will weigh down on profitability.
In the unprecedented downgrade, the brokerage slashed Caterpillar’s stock from buy to sell, driving it sharply down on Tuesday
To be precise, there will be an 8% decline in earnings and as much drop in sales next year, when the construction downturn is likely to eclipse the positive momentum in energy and mining. The main markets where the company faces the challenge are North America, China, Europe, and the Middle East.
The company had a rather unimpressive start to the year, posting weaker than expected earnings for the fourth quarter which spurred a stock selloff, despite a double-digit increase in revenues. The market was disappointed by the wide margin by which the bottom-line missed the forecast, which the management attributed to lower revenue generation in Asia due to the faltering demand in China.
The company’s most recent earnings guidance for fiscal 2019 falls at the lower end of analysts’ consensus estimate. Considering Caterpillar’s high exposure to the Chinese market, which accounts for about one-tenth of its total sales, the prevailing situation does not bode well for the company.
Caterpillar shares retreated from a five-year high Tuesday, losing more than 3%. The stock, which has dropped about 6.6% over the past twelve months, witnessed significant volatility in recent months amid the uncertainties caused by the trade war and the slowing Chinese economy.