Societe Generale: Caterpillar's Low Expectations May Be Blessing In Disguise

• Caterpillar Inc. (NYSE: CAT) shares are down 24 percent year-to-date, and are trading close to the lower end of their 52-week range of $70.23 - $107.12.
• Societe Gererale’s Henry Kim maintained a Buy rating for the company, while reducing the price target from $110 to $104.
• Although Caterpillar's sales have continued to decline, Kim believes there is upside in the company’s shares, given the low expectations.

Caterpillar announced rolling 3-month retail sales, reflecting an 11 percent y/y decline in global machine sales in the three months ended August. The decline in Energy & Transportation accelerated to 21 percent, from 14 percent in July.

Analyst Henry Kim reported, “While it would take a few quarters for any recovery to show in CAT’s retail sales statistics and we expect continued headwinds in Oil & Gas (12% of sales) and Mining (12% of sales), we still believe any leading signs of end-market recovery as we exit the year could serve as a catalyst for shares.”

Caterpillar’s machine sales have declined every month since December 2012. Expectations are now low. Kim pointed out, “We note signs of end-market recovery in a similar low expectation environment led to a material outperformance for CAT shares in H2 09.”

“CAT’s share performance so far today (CAT up 0.1% more than S&P 500) indicates investors were braced for challenging retail sales,” the analyst added. The price target has been reduced to reflect a lower 2015 S&P 500 multiple, following the recent downturn.