Oil report

UPDATE 1-Goldman Sachs cuts Caterpillar to sell

Dec 12 (Reuters) - Goldman Sachs downgraded Caterpillar Inc CAT.N to "sell" from "neutral," citing capital spending cuts due to the commodity downturn and the lack of available loans for construction projects and equipment.

The brokerage also cut its price target on the stock to $32 from $38.

Caterpillar, a component of the Dow Jones Industrial Average, is the world’s largest maker of heavy construction and mining equipment and also has a financial products segment.

“We don’t expect Caterpillar earnings to bottom until the second half of 2010 and recent gains on stimulus optimism is likely to be more than offset by the reality of cuts in mining and oil & gas capex,” analyst Terry Darling wrote in a note to clients.

Though mining and oil & gas are estimated to contribute to only about 30 percent of the company’s revenue, they account for 50 percent to 60 percent of its gross profit, Darling said.

“With risk that CAT’s spreads could widen further, we believe the refinancing of another $3 billion to $4 billion of debt by year-end 2009 is likely to be costly,” Darling said, adding it may provide another headwind to earnings.

Credit loss provisions for CAT Financial are also likely to grow as loan and lease default rates rise, used equipment values decline, and economic conditions deteriorate further, Darling added.

The analyst, who also sees a risk of backlog cancellations for the company, said funding costs for CAT and CAT Financial have increased sharply.

Shares of the company dropped 6 percent to $39.70 in pre-market trade Friday. (Reporting by Antonita Madonna Devotta in Bangalore; Editing by Gopakumar Warrier)