Buy Caterpillar on Improvements in China: Citi

Shares of heavy machinery maker Caterpillar Inc. (CAT) continue to rally this week as a bullish note from a team of analysts on the Street preceded the company's earnings beat on Tuesday before market open. Trading up about 2.4% on Tuesday morning at $157.64, CAT reflects a 0.4% increase year-to-date (YTD) and a 62.9% increase over the most recent 12 months period, outperforming the broader S&P 500's 0.2% gain and 12.9% return over the same respective periods. Caterpillar's rally comes after worries of a global trade war dragged shares to post their worst quarterly performance in three years. 

The Peoria, Illinois-based industrial manufacturing giant lifted its 2018 profit projection by as much as 24% Tuesday. Q1 results beat top and bottom line estimates, driven by continued growth in demand for its signature yellow machines and strength for construction in North America and infrastructure in China. (See also: 4 Oversold Stocks Poised to Soar on Earnings.)

CAT's earnings beat supports a bullish note from a team of analyst at Citigroup, who upgraded shares to buy from neutral Monday, citing improvements in the Chinese construction segment. "Recent outsized seasonal draws in China steel inventories point to improving construction sector activity,” wrote Citi analyst Timothy Thein, also pointing to positive estimate revisions and increased capital returns as drivers of the upgrade.

Gains Against Backdrop of Strong Global Economy

Thein noted that Citi's forecast is "predicated on" a "rebound in global growth to extend through 2019, which will help to support continued revenue/earnings per share (EPS) upside especially given more of its later-cycle characteristics." The analyst warned that the industrial 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," wrote the analyst, noting that although China trade fears cannot be ruled out as an overhang for the sector, the team's economist "believe it is likely averted." 

Thein's 12-month price target of $180, lowered from $185, reflects a 14% upside.