Investing

Caterpillar shares hit a record after UBS upgrades on a US construction comeback

Key Points
  • UBS recommends Caterpillar shares, citing positive results from a survey of the industry's capital spending plans.
  • "Analysis suggests a re-acceleration of US private construction activity, and our UBS Evidence Lab survey indicates that mining capex should continue to improve in 2018," the firm's analyst writes.
Daniel Acker | Bloomberg | Getty Images

The mining equipment market will grow next year, and that will boost Caterpillar's business, according to one Wall Street firm.

UBS raised its rating for Caterpillar shares to buy from neutral, citing positive results from the firm's survey of the industry's spending plans. The stock rose 2 percent to a record high after the UBS report.

We upgrade Caterpillar "to reflect our new evidence that a continuation of the earnings upcycle is ahead and that CAT's growing cash position will drive upside to earnings and returns as it gets deployed," analyst Steven Fisher wrote in a note to clients Monday. "Our UBS Evidence Lab Macro analysis suggests a re-acceleration of US private construction activity, and our UBS Evidence Lab survey indicates that mining capex should continue to improve in 2018."

Fisher raised his Caterpillar price target to $140 from $116, representing 15 percent upside from Friday's close.

Fisher said a UBS survey of 50 mining companies found that 60 percent intend to spend more next year for new mining equipment.

"UBS equipment rental surveys remain positive for business conditions and pricing," he wrote.

As a result, Fisher raised his 2018 earnings per share estimate for Caterpillar to $7.50 from $5.90. He also forecasts the company will generate nearly $10 billion of cash flow in total after capital expenditures and dividends from 2018 to 2020.

"We think the fundamental setup on the stock is as strong as it has been in several years. All its major segments are now growing," Fisher said in an interview on CNBC's "Power Lunch" Monday. "We've seen commodity prices that support [Caterpillar's] business remain stronger than expected."

Caterpillar stock is up 31 percent year to date through Friday versus the S&P 500's 12 percent return.

— CNBC's Michael Bloom contributed to this story.

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