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Gordon Johnson On Sell-Rated Caterpillar: You Can't Fool All The People All The Time

Caterpillar, Inc. NYSE:CAT - Gordon Johnson On Sell-Rated Caterpillar: You Can't Fool All The People All The Time

Following the lower-than-consensus 2017 sales guidance issued by Caterpillar Inc. CAT, Axiom’s Gordon L. Johnson II believes the company’s 2–17 revenue guidance as a real near-term risk.

Johnson maintains a Sell rating on the company with a price target of $31.

Revenue Guidance Risk

Terming the sales guidance Caterpillar’s “Black Swan,” the analyst mentioned that historically, the company’s backlog expected to be shipped over the next year is usually 26.6 percent of the year’s sales guidance.

Given the sales guidance of $32.4 billion, Johnson explained it indicated an “inherent risk” to the revenue guidance, since a lower number in terms of backlog would mean the revenue guidance would not be backed by forward 12-month shipment out of backlog.

This has only happened twice in Caterpillar’s history, once in 2003 “when it was clear we were entering an EM commodity super-cycle” and the second time in 2009, “when China had just embarked on a CNY4tn stimulus targeted at infrastructure & we were exiting the great recession,” the analyst stated.

“With the factors prevalent in ’03/‘09 virtually nonexistent today, we see CAT’s ’17 rev guide as a real/n-term risk,” Johnson went on to say.

Risk To Business Segments

The analyst also expressed concern regarding the different business segments, saying that weaker mining capex in the RI segment did not seem like a temporary event, and continued margin pressure was likely in this segment.

In addition, Johnson expects the E&T segment to see continued headwinds, while the CI segment is likely to witness continued margin erosion and pricing pressure.

Finally, for Caterpillar’s financial segment, the analyst expects costs to continue rising.

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