Caterpillar Inc. (CAT), Goldman Sachs Group, Inc. (GS): Wednesday’s Top Upgrades (and Downgrades)

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines include new buy ratings for semiconductor companies Atmel Corporation (NASDAQ:ATML) and QUALCOMM, Inc. (NASDAQ:QCOM). It’s not all good news, however…

Downgrade for CAT

Caterpillar Inc. (NYSE:CAT) investors were rudely awakened from their catnaps Wednesday morning, when Goldman Sachs Group, Inc. (NYSE:GS) announced it was downgrading the shares. Goldman Sachs Group, Inc. (NYSE:GS) only downgraded to neutral, mind you, but still, the analyst’s warning that the commodities market looks “over-supplied,” resulting in less need for Caterpillar Inc. (NYSE:CAT)-built mining equipment to dig more rocks out of the earth, doesn’t sound like good news.

Goldman Sachs Group, Inc. (NYSE:GS) cut Caterpillar Inc. (NYSE:CAT)’s earnings estimates by 10%, 13%, and 11% respectively over the next three years. According to StreetInsider.com, for example, Goldman Sachs Group, Inc. (NYSE:GS) sees Caterpillar Inc. (NYSE:CAT) earning only $7.66 a share, versus its earlier guess of $8.54. That’s a big enough change — if Goldman Sachs Group, Inc. (NYSE:GS)’s right — to swing Caterpillar Inc. (NYSE:CAT)’s forward P/E ratio from the currently estimated 9.0 all the way up to 11.0. But is it a big enough change that it should scare you away from the stock?

It depends. On the one hand, if you value Caterpillar Inc. (NYSE:CAT) solely on its P/E ratio and growth rate, then the company’s current 10 times earnings P/E ratio, or even the 11 times Goldman Sachs Group, Inc. (NYSE:GS) is predicting for next year, doesn’t look particularly pricey relative to expectations for 14% long-term earnings growth. On the other hand, though, CAT has been producing very little real cash profit of late — a mere $165 million in free cash flow over the past 12 months, versus the $5.7 billion it’s claimed to be earning under GAAP accounting standards.

That’s a big enough discrepancy, in my view, to warrant caution on the stock. It’s more than reason enough to justify Goldman Sachs Group, Inc. (NYSE:GS)’s downgrade.

Next up: QUALCOMM, Inc. (NASDAQ:QCOM)
As Goldman busied itself writing up a downgrade on Caterpillar, over at Northland Securities they were doing the opposite for QUALCOMM, Inc. (NASDAQ:QCOM) — initiating the stock with an outperform rating and a $80 price target. Sadly, I expect this target to also fall short of the mark.