Wall Street's sentiment towards Caterpillar stock has taken a hit following an analyst downgrade. While the iconic maker of yellow machines is losing favor, analysts are turning towards a maker of green machines - Deere, which is gaining popularity amongst investors.
The Cycle Divergence
The main reason for this shift in preference is the cycle. Evercore ISI analyst David Raso recently downgraded Caterpillar stock to Hold from Buy, with a price target raised to $338 from $321. Raso advised investors to consider taking profits after Caterpillar stock rose by 26% in the past three months.
After the downgrade, Caterpillar shares dropped by 1.7% to $316.32 in early trading. This decline contrasted with the S&P 500's 0.6% decrease and the Dow Jones Industrial Average remaining flat.
Analysts' Ratings and Targets
Around 37% of analysts covering Caterpillar stock have Buy ratings, which is lower than the average Buy-rating ratio for S&P 500 stocks at about 55%. The average analyst price target for Caterpillar shares aligns closely with current trading levels at $315.
In contrast, Deere stock is more favored by analysts with approximately 56% of them giving Buy ratings. The average price targets for Deere stand at $415, signaling a potential 15% increase from recent levels.
Cyclical Challenges Ahead
Both Caterpillar and Deere are cyclical companies, meaning their earnings are heavily influenced by overall economic activity and factors such as crop prices in Deere's case. Both companies are projected to experience declining earnings in 2024 compared to 2023, according to FactSet.
Deere faces a more challenging outlook, with Wall Street estimating earnings per share of around $28 in 2024 - a decrease from nearly $35 in 2023. In contrast, Caterpillar is expected to maintain flat earnings per share at $21.21 achieved in 2023.
Despite the differing prospects, Deere remains the preferred choice amongst analysts. This preference stems from the belief that Deere is further along its downcycle, hinting at a potential upcycle on the horizon for the company.
Corn Prices Plunge 35% - Farmers Facing Tighter Budgets
Corn prices have plummeted more than 35% year over year, spelling trouble for farmers across the United States. The U.S. Department of Agriculture projects a substantial decrease in net farm income for 2024, estimating it to be around $114 billion compared to the $156 billion recorded in 2023. With diminishing crop prices and incomes, farmers are finding themselves with less funds to allocate towards essential equipment like tractors.
Farmers Brace for Second Consecutive Decline
This year marks the second consecutive decline for farmers, following the record income of $186 billion achieved in 2022. Despite the projected $114 billion figure being significantly lower, it still stands as the fifth-best year on record for farmers. The downward trend in earnings is viewed as a positive cyclical event on Wall Street.
Caterpillar Faces Mixed Outlook Amid Booming Construction Market
While falling crop prices pose challenges for agricultural equipment manufacturers like Caterpillar, the company’s construction sector remains resilient. The U.S. residential and commercial construction industry is currently valued at approximately $2.1 trillion annually, reaching an all-time high. This surge in construction activities not only fuels demand for heavy machinery but also serves as an indication that further growth may be limited.
Stock Valuations Reflect Industry Trends
Caterpillar's stock trades at around 15 times the estimated 2024 earnings, aligning with historical averages as reported by FactSet. In comparison, Deere's stock is priced at about 13 times the estimated 2024 earnings, marking a discount to its typical multiple of 15 times. Typical of cyclical stocks, these companies often trade at lower earnings multiples during peak cycles and higher multiples in down cycles.
Wall Street's Perspective on Deere Stock
Deere stock, currently trading at a lower multiple of earnings near the cycle's trough, is under scrutiny among investors. Analysts like Raso maintain a "Hold" rating on Deere stock with a price target of $387, reflecting the cautious sentiment prevalent on Wall Street.
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