Wednesday, January 14, 2009

Catepillar (NYSE:CAT): Risk/reward has tilted more negative - Morgan Stanley

Morgan Stanley is out uber negative on Catepillar (NYSE:CAT) this morning saying risk/reward has tilted more negative for CAT shares.

Recent comments by the CEO of competitor Hitachi Construction—who has “never before experienced seeing sudden, simultaneous drops in worldwide demand” and is seeing global demand down 25-30%—support their bearish view on the shares. MSCO's 2010 EPS estimate of $2.57 is 40% below consensus ex-MS. CAT has held that emerging markets revenues would grow in 2009; they’ve argued for a steep fall but allowed for the possibility of upside. Upside now seems very unlikely.

Differentiation from consensus:
First, they doubt stimulus will have much of an impact on equipment sales, especially in 2009.
Current talk in DC still supports around $85bn in infrastructure, with half contracted within the year, and a likely multi-year spending curve. The resulting math does not mean much in a trillion dollar construction market. And China loader sales continue to decline through December despite the announced stimulus there. Second, they believe 2010 will be weaker than 2009. Construction and project planning timelines are just too long, and a recovery in 2010 is highly unlikely. Finally, they are concerned that mining, oil and gas revenues could turn substantially negative in 2009. Rig counts are falling sharply, with room to the downside, and mining capex constraints may outweigh the effect from fleet renewal.

Reiterates Underweight and $31 tgt noting their Bear Case is $16 as synchronous fall in virtually all markets leads to earnings troughing at $1.05 in 2010, well below CAT’s internal goals but in line with last downcycle. Cancellations of oil and gas rigs through 2011 depress earnings in an extended downcycle, accentuated by dealer inventory swings and a slow curve to cutting expenses.

Notablecalls: I think CAT stock will see selling pressure on this. Imagine being long the name and seeing this comment from Mother Morgan - would you sell? I think I would.

CAT's a short this morning.

The most interesting tid-bit from the call is that MSCO now thinks 2010 will be worse than 2009. That's certainly out of consensus.

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