William Blair Weighs In On Two Construction Equipment Makers: Caterpillar Inc. (CAT), Deere & Company (DE)

William Blair analyst Lawrence De Maria was out with his views on shares of construction equipment makers Caterpillar Inc. (NYSE:CAT) and Deere & Company (NYSE:DE). The analyst reflects on Caterpillar’s Chinese excavator sales and Deere’s recent earnings results. Let’s take a closer look.

Caterpillar Inc.

William Blair’s Lawrence De Maria reiterated a Market Perform rating on shares of Caterpillar, with a price target of $60, as Chinese excavator sales were down 17% in January, following 25% drop in December.

De Maria wrote, “Expectations are low on China excavator sales, given the general weakness in China, and hope for a near-term recovery is muted [..] In addition, expectations are that the reversal of the residential and commercial real estate boom will lead to decreased demand for construction machinery. For Caterpillar, total China revenue represents a few percent of sales, and is a solid indicator for the health of general commodity demand.”

Furthermore, “In full year 2015, Caterpillar’s overall unit market share of 12.7% was about 179 basis points higher year-over-year. The company’s market share of 16.4% in January was the second-best month the company has posted, and a big step up from the 2015 levels [..] Given the weak market and Caterpillar’s outperformance, we believe there is a risk that the company is overproducing, which will make the excess global inventory situation worse. Should the currency weaken more precipitously, this could be used for export to certain markets.”

According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Lawrence De Maria has a yearly average return of -7.2% and a 31% success rate. Maria has a -15.1% average return when recommending CAT, and is ranked #3130 out of 3640 analysts.

Out of the 16 analysts polled by TipRanks, 3 rate Caterpillar stock a Buy, 9 rate the stock a Hold and 4 recommend a Sell. With a return potential of 6%, the stock’s consensus target price stands at $69.17.

Deere & Company

Following the release of Deere’s fiscal first quarter 2016 results this morning, De Maria reiterated an Underperform rating on the stock, with a price target of $75, which represents a slight downside potential from current levels.

Maria observed, “Equipment results missed across the board on the top line and on margins. However, reported EPS of $0.80 actually beat consensus of $0.71 due to a lower tax rate ($0.09 benefit), and were basically in line with our estimate of $0.82. A lower share count than what we modeled also helped EPS. Ag and construction segments were both weak but construction was worse than expected; foreign exchange and volume were the biggest headwinds. We had some concerns on ag and turf because of the production cuts in the January in North America, which led Deere’s 2WD and 4WD production at Waterloo to be down 26% in the first fiscal quarter.”

“We remain concerned that the excess inventory situation (new and used) will spill in to 2017. At around $80, the stock is trading at about 19 times 2016 implied EPS, which is a healthy multiple. We give Deere credit for operating well in a challenging time but believe that there is little reason for optimism in the next couple of years and that next year may be set up for disappointment,” the analyst concluded.


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