Caterpillar Inc. (NYSE: CAT) presented at this week’s Bank of America Global Industrial Conference in London. Bank of America analyst Ross Gilardi attended the Caterpillar presentation and is bullish on the stock after hearing what the company had to say.
Caterpillar said the combination of higher raw materials prices, a weaker U.S. dollar and longer lead times has sent construction prices drifting higher, a phenomenon that the company anticipates will continue in the near term. Gilardi says it’s unlikely that Caterpillar will be able to repeat its pricing gains from 2017, but he said the company’s 2018 pricing commentary was slightly more positive than it has been in the past, especially regarding North America.
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Caterpillar noted that the recent changes that the Federal Energy Regulatory Commission made to income tax allowances for master limited partnerships will not have a major impact on Caterpillar’s oil and gas business.
In the mining industry, Caterpillar says parts sales will likely increase in 2018, while new equipment sales remain depressed after a slight uptick in the fourth quarter. Miners remain focused on controlling costs and streamlining their operations, but iron ore and coal capital expenditures have begun to increase in Australia and South America.
While Caterpillar admitted that non-residential construction spending is likely approaching the peak of its current cycle, the company said residential construction spending still has plenty of room for improvement and infrastructure construction should be up in 2018.
Finally, Caterpillar said that steel makes up a large part of the weight of its machines, but it is only a small part of their total cost. The company pointed out that it has a long history of dealing with cyclical changes in steel prices.
“Caterpillar continues to believe steel tariffs are a manageable risk due to its global footprint and procurement network,” Gilardi says. “In our view, the incremental takeaway was Caterpillar’s more constructive tone on pricing in construction industries, particularly North America.”
CFRA analyst Elizabeth Vermillion says 2018 will be another strong year for Caterpillar.
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“After years of cost cutting and given its large market share in its addressable markets, we see CAT as well-positioned to capitalize on leaner dealer inventories, increasing backlog and increased infrastructure spending if a bill is passed,” Vermillion says.
Bank of America has a “buy” rating and $190 price target for Caterpillar. CFRA has a “strong buy” rating and $205 target for CAT stock.
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Caterpillar Inc. (CAT) Optimistic About North American Construction originally appeared on usnews.com
