Caterpillar does best when the economy is growing.
Scott Olson/Getty ImagesIt’s time to turn more positive on Caterpillar stock. Things are looking up for the maker of heavy-duty machinery heading into 2021.
Bernstein analyst Chad Dillard, for one, is more upbeat. In October, he recommended investing pros sell short Caterpillar (ticker: CAT) stock, but take a long position in the rental-equipment giant United Rentals (URI) “given the pandemic uncertainty.”
He feels better now. “With mass vaccination on deck entering 2021, we are adopting a more (cyclically) constructive view,” wrote Dillard in a Thursday research report. Still, he rates Cat shares at Hold, though he increased his price target to $200 from $156 a share.
Cat stock was at $177.32 in late morning trading on Friday.
Caterpillar, and other cyclical stocks, typically outperform the market when the economy is growing. If all goes well, 2021 will be the year of mass vaccinations, with the economic rebound that is likely to make possible. All that should lead to more construction activity and higher expectations for the earnings of machinery companies such as Cat.
Dillard is still on the sidelines, however, because of lingering doubts about profit margins and the strength of the recovery. Citigroup analyst Timothy Thein feels more optimistic, rating shares at Buy, although at $175, his price target is slightly below the stock’s current level.
Thein spoke with a Caterpillar equipment dealer recently, noting on Friday that sentiment among construction contractors is “solid,” and that dealers appear to expect sales to be up roughly 8% in 2021. That is consistent with guidance provided by Deere (DE, another maker of construction equipment, as well as Cat.
Investors think of Deere as an agricultural company, which it is. But the company gets about 35% of total sales from construction and forestry.
The “construction opportunity may be larger than currently appreciated,” wrote Baird analyst Mig Dobre in a Friday research report. Dobre says Deere management will leverage some the precision-farming technology developed for agricultural markets in its construction products. Deere’s “strong dealer network and brand power offers synergy opportunities in selling construction equipment,” he wrote.
Dobre rates Deere stock the equivalent of Buy and has a $300 price target for shares. He covers Cat as well, rating that stock at Buy too. His price target is $306 a share.
He believes machinery stocks can have a good year in 2021, calling it “early cycle.” That refers to the sweet spot when the economy goes from shrinking to growing, and when machinery stocks typically perform the best.
Performance has been good recently. Both stocks are up, although year to date, Deere has the upper hand on Caterpillar, with a gain of 46%. Cat stock has gained 20%. Both numbers are better than the 13% and 5% respective returns of the S&P 500 and Dow Jones Industrial Average.
Write to Al Root at allen.root@dowjones.com
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