Citigroup upgraded shares of Caterpillar (NYSE: CAT) to buy from neutral on Monday, noting the industrial giant will benefit from improvements in the Chinese construction sector.
"Recent outsized seasonal draws in China steel [inventories] point to improving construction sector activity," analyst Timothy Thein wrote in a note. "Our commodities team believes a pickup in China growth indicators is coming, which would help to lift industrial metals prices."
"We also believe CAT has been able to increase prices in China on the back of the strength in construction markets (and low dealer inventories)," he said.
China has historically been a big buyer of Caterpillar construction machinery. The analyst also pointed to positive estimate revisions and increased capital returns as reasons for the upgrade.
"This is predicated on Citi macro forecasts that call for a rebound in global growth to extend through 2019, which will help to support continued revenue / EPS upside especially given more of its later-cycle characteristics," Thein said.
However, Thein noted the 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," he said.
There is also the possibility that the U.S. and China engage in a trade war in the near future as trade tensions between the two countries increase.
Thein trimmed his price target on Caterpillar however to $180 per share from $185, implying a 17.5% upside from Friday's close.
CAT shares gained 61 cents Monday to $153.86
