Goldman Remains Cautious On Construction Machinery Names

• Jerry Revich of Goldman Sachs maintained a cautious view on the Machinery and Engineering & Construction sector.
• Revich sees further "significant" downside in key global commodities and cuts to capex reinvestment rates as hurting the sector.
• The analyst downgraded shares of KBR, Inc. (NYSE: KBR) to Sell and turned incrementally bearish on Caterpillar Inc. (NYSE: CAT) and Joy Global Inc. (NYSE: JOY).

Revich highlighted two ongoing concerns that can plague the sector: 1) an extended commodity deflation cycle, and 2) an ongoing multi-year capex reduction that diminishes the demand for heavy machinery.

KBR Downgraded To Sell

Revich downgraded KBR to Sell from Neutral and expects further downside to his $19 price target given a "challenging outlook" for the company's medium-term earnings growth. The analyst also noted the company will suffer from "significant" cuts to large scale energy projects.

Revich did note that he is "positive" on KBR's turnaround progress. However, additional margin expansion moving forward will "prove challenging," especially in the ongoing commodity deflation cycle.

Caterpillar Maintained At Neutral

Revich maintained a Neutral rating on Caterpillar with a price target lowered to $67 from a previous $72. The revised price target is based on a 5 percent drop in Construction Industries sales, and a reduced EBITDA margin estimate in Resources.

The analyst's Neutral rating remains unchanged given the company's competitive position within the "challenging end market." In addition, the company could benefit in 2017 as U.S. shale capex profiles begin recovering at that time.

Joy Global Maintained At Sell

Finally, Revich maintained a Sell rating on shares of Joy Global with a price target lowered to $8 from a previous $14 due to a 5 percent reduction in after-market sales forecasts and lower Underground new equipment sales versus prior expectations.

Revich added that even though Joy Global's stock is already "down significantly" over the past two years, it is still important to keep in mind that: 1) coal is "structurally" losing share to natural gas and alternative energy sources, 2) the base metals deflation cycle remains in the "early stages," and 3) the company's tangible book value of $900 million is higher than the stock's $1.4 billion market cap.