Bank of America Merrill Lynch wasted no time in recommending clients rush out and buy one of the key companies impacted by the China-U.S. trade war, now in a ceasefire.
Caterpillar to buy from neutral and raised its 12-month price forecast on the stock to $163 from $140 in a note on Monday. Caterpillar shares jumped more than 4 percent in premarket trading to $141.46.
“We are still late in the cycle, but two key macro developments lead us to upgrade CAT at 10.9x 2019E EPS and an 8% FCF yield. First, Fed Chairman Jerome Powell seemed less hawkish last week on the future path of interest rate increases, and 2) the US-China agreed to a temporary cease fire on additional US tariff increases,” stated the note by analyst Ross Gilardi.
“We see 20 percent upside potential,” added the analyst.
President Donald Trump and Chinese President Xi Jinping, who met for dinner on Saturday at the G-20 summit in Argentina, agreed to hold off on additional tariffs on each other’s goods at the start of the new year to allow for talks to continue for 90 days. The U.S. agreed to leave tariffs on more than $200 billion worth of Chinese products at 10 percent.
In the meantime, Caterpillar may get some direct help from the weekend talks as China agreed to purchase a “substantial” amount of agricultural, energy, and industrial U.S. products.
The temporary agreement boosted crude oil, with WTI futures jumping 4 percent.
“Caterpillar’s share price is highly correlated with crude oil prices and crude is down over 30 percent since early October,” wrote Gilardi. “Some combination of global demand improvement and/or supply curtailments could propel CAT higher if WTI starts to recover.”