Caterpillar stock price dives 9% as Bank of America downgrades stock rating

Shares of Caterpillar (NYSE:CAT), the heavy machinery giant, plunged 9% today after the Bank of America downgraded Caterpillar’s stock due to the company’s exposure to the energy industry.

Fundamental analysis: Sell CAT stock, warns analyst

Bank of America analyst Ross Gilardi downgraded the Caterpillar stock from “neutral” (hold) to “underperform” (sell), with a stock target set at $115, around $1 higher than the current market price of Caterpillar’s shares.

“Energy and mining stocks are signaling another severe capital spending downturn in two of CAT’s most important end markets,” Gilardi writes.

“The traditional playbook has been to buy CAT in the depths of recession as central banks inject massive monetary and fiscal stimulus to guide a global recovery. We don’t subscribe to this theory this time,” said Gilardi.

Extremely low oil prices will hurt Caterpillar’s core business – production of heavy machinery. The major oil producers are the key customers for Caterpillar, and less cash flow for them is likely to translate into the decreased budget for capital expenditures e.g. heavy machinery.

“Cat derives only 10% of revenue directly from oil and gas,” said Gilardi. “But its Construction and Mining products touch the energy sector in many places too.”

It is estimated that Caterpillar generates around one-third of its revenue from sales of its “Energy and Transportation” segment.

Caterpillar stock is trading at around 14 times estimated 2021 earnings, which is slightly cheaper than the broader market’s valuation ratio of 16 times. Before the coronavirus outbreak, the company said it expects to earn about $9.25 a share in 2020.

Technical analysis: The positive momentum slows down

Shares of the company are trading around 9% lower today, following the news of a stock downgrade. This news is likely to provide a serious blow for the bulls, who managed to facilitate a very good rebound since shares hit the lowest levels since 2016 in March.

For the record, the stock price recovered 48% of the losses recorded in February and the beginning of March before the momentum started running out of gas on Friday, when shares of Caterpillar lost nearly 2%.

The bulls came very close to test a key resistance around the $130 mark, where two key moving averages create a confluence. On the downside, the stock price is likely to test an important short-term support near the $110 handle.

Summary

Shares of Caterpillar plunged nearly 9% today after the Bank of America analyst downgraded the stock to “neutral” (hold) to “underperform” (sell), with a stock target set at $115, due to the company’s high exposure to the energy sector and low oil market prices.