Evercore ISI downgrades machinery sector; Caterpillar also suffers

Investing.com - The U.S. machinery sector has performed very strongly over the past two years since the Federal Reserve began its interest rate hike cycle, but now looks like the time to take profits, according to Evercore ISI, as it downgraded the sector.

The average stock appreciation in the sector is more than 40% in the past two years since the Fed rate hike cycle began, compared with the benchmark S&P 500 index gaining 14%.

This strong performance has “survived” the past 24 months’ heightened fears of recession, that 2023 EPS would be down sharply and then fears 2024 EPS would be down sharply.

However, the stocks’ valuations, broadly speaking, have moved from just requiring avoiding an EPS collapse to then just needing to avoid a down year to now requiring sales and EPS reacceleration into 2025, and, for most names, growth in 2026 as well.

This may be asking too much, and thus the brokerage has downgraded the Machinery sector to ‘in line’ from ‘outperform’.

Three individual companies have also been caught in the wash, with Caterpillar (NYSE: CAT), Ingersoll Rand (NYSE: IR) and Timken (NYSE: TKR) also each downgraded to ‘in line’ from ‘outperform’.

“Their target prices are raised but stock moves leave modest upside to new targets,” the brokerage said in a note dated Feb. 19. The “same can be said for most of our names as our target prices are raised but most of our stocks are ‘already there’.”

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