Even After The Election Rally, Caterpillar Remains Deutsche Bank's Top Pick

Caterpillar Inc. (NYSE: CAT) remains the top pick for Deutsche Bank, despite recent election rally. The brokerage remains bullish over the company’s EPS growth potential of the construction and mining equipment maker.

Analyst's Take

“[W]e have very high conviction that EPS is reaching a trough in 2016e, and a combination of restructuring, mining A/M recovery, and infrastructure stimulus will drive EPS growth in 2017e and beyond,” analyst Nicole DeBlase wrote in a note.

Further, the key driver of DB’s Buy rating on Caterpillar and $102 price target is the stock’s valuation. The stock now trades at 30x NTM EPS, 2x its 10-year median.

“If we apply the company’s 10Y median P/E multiple of 15x to our $7.76 midcycle EPS forecast, we come to $116/share, 22 percent upside vs. the current price,” DeBlase highlighted.

In addition, the analyst expects an EPS boost for Caterpillar upon realization of potential repatriation benefit. The company have $5.3 billion of cash trapped overseas, which could fuel 9 percent EPS accretion ($0.30) assuming 100 percent of it is spent on share repurchases.

The Sector

On the sector front, the analyst said stocks would take a breather following 12 percent rally in the last one month, fueled by optimism around a potential infrastructure stimulus, corporate tax reform and a repatriation tax holiday.

“We believe the entire group is likely to take a breather over the next few months as incremental macro news is limited by the current lame duck session,” DeBlase added.

At last check, shares of Caterpillar were up 1.79 percent at $97.36.