News Press Releases

Goldman Sachs Downgrades Trio Of Construction Product Stocks

DE, SUM, TEX, KBR, MLM, CMI, CAT | October 11, 2016

Goldman in a research note released on Monday raised its machinery coverage view to Attractive but lowered its construction products coverage to Neutral. Noting that the construction spending in the United States has increased 28 percent since it turned positive on the U.S. construction cycle in 2013, the firm said it continues to be positive on a continued construction recovery.

However, analyst Jerry Revich noted that the pace of recovery is slowing. Specifically, the analyst sees rising risk in the private non-residential vertical, where greenfield chemicals and LNG investment is at peak. Accordingly, the analyst downgraded three construction products stocks, namely KBR, Inc.(NYSE: KBR), Martin Marietta Materials, Inc. (NYSE: MLM) and Summit Materials Inc (NYSE: SUM).

Goldman, however, believes that the machinery end-markets are bottoming. The firm is of the view that manufacturing restructuring is likely to drive structurally higher margins for Caterpillar Inc. (NYSE: CAT), Cummins Inc. (NYSE: CMI), Deere & Company (NYSE: DE) and Terex Corporation (NYSE: TEX).

Limited Growth Prospects For KBR

Goldman downgraded KBR to Sell, citing its limited growth prospects. The firm believes the company will be challenged to grow earnings due to its heavy exposure to core LNG and greenfield ammonia capex cycles, which contribute 35 to 40 percent of EBIT. These, according to the firm, are in early stages of decline.

Downgrading Martin Marietta, Summit Materials On Slowing Growth

Goldman downgraded Martin Marietta Materials and Summit Materials Inc to Neutral, as it sees a slowdown in growth in the fourth year of the construction recovery amid broadly positive investor sentiment. The firm's lowered opinion on Martin Marietta stems from the fact that the private non-residential construction recovery has played out and public construction recovery is progressing at a slower pace than expected, especially in Texas.

Goldman lowered its price target on the firm to $202 from $210, premising the action on reduction to its mid-cycle EV/EBITDA multiple to 10 times from 10.3 times previously.

Meanwhile, on Summit Materials, Goldman noted that the company, though executing on acquisition integration, has seen its organic growth challenged. The firm lowered its price target om the firm to $21 from $22.

Caterpillar To Have $8 In Mid-Cycle Earnings

Goldman upgraded Caterpillar to Buy, as it sees $8 in mid-cycle earnings driven by manufacturing footprint reductions in Europe construction industries, Resources product and manufacturing consolidation and a recovery in reciprocating engine demand in energy & transportation.

The firm sees the company benefiting from an eventual normalization in mining equipment share of capex budgets. Additionally, the firm sees scope for further SG&A and R&D cost reductions following tier 4 product cycle. Goldman raised its 12-month price target on the shares of the company to $112 from $76.

Power Systems Consolidation, Operating Leverage To Benefit Cummins

Goldman sees upside to the Cummins' mid-cycle earnings estimates, driven by power systems operational consolidation and operating leverage, as it expects U.S. truck capex to improve in 2018 off a 2017 trough. As such, Goldman upgraded the shares of the company to Buy from Neutral and raised its price target to $162 from $134.

Lower Tier-4 Transition Costs To Drive Margins Of Deere

Goldman noted that Deere's third-quarter results confirm its view that structurally higher mid-cycle margins are near the trough. The firm also noted that the company was able to deliver 160 basis points of margin improvement in the ag &turf business despite lower sales. The firm expects the lower tier-4 product transition costs that drove outperformance in the third quarter to drive upside to margin estimates in the coming quarters.

At Last Check ...

Caterpillar was up 0.79 percent at $88.92.
Cummins was up 1.87 percent at $130.57.
Deere & Company was flat at $87.50.
KBR was down 5.6 percent at $15.35.
Martin Marietta was down 0.81 percent at $169.86.
Summit Materials was down 2.21 percent at $18.57.
Terex was flat at $24.70.

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