BofA Downgrades Caterpillar, Says Energy Problem Is Here To Stay

Energy is a problem end market and Caterpillar Inc. (NYSE: CAT) has energy exposure throughout its product portfolio, according to BofA Securities.

The Caterpillar Analyst

BofA’s Ross Gilardi downgraded Caterpillar's stock from Neutral to Underperform, keeping the price target at $115.

The Caterpillar Thesis

Traditionally the strategy has been to buy Caterpillar’s stock amid a recession, as central banks inject monetary and fiscal stimulus to lift the economy; Gilardi said this approach may not work this time around.

Although oil and gas directly contribute only 10% of the company’s revenue, its construction and mining products are linked to the energy sector at multiple points, the analyst said. He added that the exposure to natural gas also doesn't help, with prices hovering around 20-year lows on chronic oversupply and projections of a 4.4% decline in production in 2021.

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Both energy and mining could seem to be gearing up for massive cuts in capital spending and the downturn could be “as much structural as cyclical,” Gilardi wrote in the note.

He added that while Caterpillar has a solid balance sheet and its dividend seems secure, note the dividend yields for Exxon Mobil Corporation (NYSE: XOM) and BHP Group (NYSE: BBL) are “at the widest premium to CAT in history.”

CAT Price Action

Shares of Caterpillar declined more than 6% to $116.85 at time of publication Monday.