Citi upgrades Caterpillar as it bets on more construction in China

Citigroup upgraded shares of Caterpillar to buy from neutral on Monday, saying the industrial giant will benefit from improvements in the Chinese construction sector.

“Recent outsized seasonal draws in China steel [inventories] point to improving construction sector activity,” analyst Timothy Thein wrote in a note. “Our commodities team believes a pick-up in China growth indicators is coming, which would help to lift industrial metals prices.”

“We also believe CAT has been able to increase prices in China on the back of the strength in construction markets (and low dealer inventories),” he said.

Caterpillar shares rose 1.5 percent in the premarket Monday to $155 a share.

China has historically been a big buyer of Caterpillar construction machinery. The analyst also pointed to positive estimate revisions and increased capital returns as reasons for the upgrade.

“This is predicated on Citi macro forecasts that call for a rebound in global growth to extend through 2019, which will help to support continued revenue / EPS upside especially given more of its later-cycle characteristics,” Thein said.

However, Thein said the stock could struggle if there is a slowdown in the global economy. “Clearly our call is not early, and we are mindful of weakness in certain macro lead indicators (and further yield curve flattening) that has started to raise some doubts around the ‘synchronized global growth’ narrative,” he said.

“Trade war concerns have understandably dominated much of the discussion on China recently, and we cannot rule this out as an overhang for the sector (though our economists believe it is likely averted),” he added.

Thein, however, trimmed his price target on Caterpillar to $180 per share from $185, implying a 17.5 percent upside from Friday’s close.