Shares of Caterpillar (CAT) are on the rise on Wednesday after Bernstein analyst Chad Dillard upgraded the stock to Outperform, a Buy-equivalent rating. The analyst believes concerns about the end of the machinery cycle in 2022 are "overdone," and thinks the company should be the biggest beneficiary of the looser monetary policy in China.

CONCERNS OVERDONE: Bernstein analyst Chad Dillard upgraded Caterpillar to Outperform from Market Perform with a $240 price target. The analyst believes concerns about the end of the machinery cycle in 2022 are "overdone" and sees an uneven sector setup into 2022. The market will reward exposure to international markets and construction, while ag will lag; supply chain challenges will go beyond the mid-2022 target that managements have set, but steel costs will decline by 10% and be a margin tailwind; and channel restock will boost the cycle, Dillard contended.

The analyst believes expectations for Caterpillar are "low" and that it is an earlier cycle stock in a mid-cycle sector. Further, he thinks Caterpillar should be the biggest beneficiary of the looser monetary policy in China, with the Street also not baking in steel tailwind, which could be 85c earnings per share accretive in 2022.

UPGRADE PACCAR, DOWNGRADE AGCO: Dillard also upgraded Paccar (PCAR) to Outperform from Market Perform with a $98 price target, as he believes the market does not fully appreciate the pricing opportunity, which will drive $1.07 of earnings per share growth in 2022. Relative valuation is already at historically low levels ahead of schedule, and Dillard believes estimates for 2022 and 2023 are too low, as Paccar is set to earn $7.66 in 2022 and $8.97 in 2023, which are 13% and 17% above the Street, respectively. Additionally, the analyst sees new product introductions leading to 1% market share gains in 2022, with the truck cycle still having room to run, with a peak of at least 340,000 coming in 2023.

On the flip side, Dillard downgraded Agco (AGCO) to Market Perform from Outperform with a price target of $127, down from $177. The analyst argued that 90% of Agco's end markets are at their peak, with North America small and large ag and Europe exiting 2022 above historical peaks. Furthermore, farm economics are weakening and restock will only be a modest tailwind for Agco. The analyst feels earnings per share beats will not get rewarded since Agco is over-earning and believes incremental margin recovery may be more subdued than peers.

PRICE ACTION: In Wednesday morning trading, shares of Caterpillar have gained over 2% to $202.81.