Caterpillar Catches a Downgrade. It’s Time to Take Profits.

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For one analyst, it’s time to take profits in

Caterpillar

stock.

Monday, Baird analyst Mig Dobre downgraded Cat (ticker: CAT) stock to Hold from Buy. His price target dropped to $230 from $290 a share.

“Cat shares are nearing a cyclical pivot point following strong recent outperformance,” wrote Dobre in his downgrade report.

He said that

Caterpillar

shares are typically driven by four factors: dealer inventories, backlog, pricing relative to costs and retail sales of machines by Cat dealers. All four factors have been positives for the stock recently.

Sales volumes are up and pricing in the fourth quarter of 2022 added $1.7 billion in fourth quarter sales, while costs rose by only $900 million.

Shares have reflected that business momentum. Caterpillar stock is up about 23% over the past 12 months, outperforming the

S&P 500
by about 30 percentage points.

Now Dobre worries those factors are turning into headwinds for shares. Cat is a cyclical stock and when investors start to worry about downturns, its valuation can suffer. He sees “risk for valuation to contract toward the lower end of the [historical] range.” That’s 11 to 12 times estimated earnings, implying a $180 to $190 share price.

Cat stock is trading for almost 16 times estimated 2023 earnings currently. Over the past few years, Caterpillar shares’ PE ratio has ranged from about 10 times to 25 times estimated earnings. Cat stock typically trades for 10 times when things are looking their strongest. Shares trade for a bigger multiple when earnings are depressed by weak business conditions.

Shares are down 1.4% in premarket trading Monday. S&P 500 and

Dow Jones Industrial Average
future are up about 0.4% and 0.2%, respectively.

Dobre isn’t alone in his cautious view. About 39% of analysts covering the stock rate shares Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 58%.

The average analyst price target is about $255 a share. Cat stock is trading at about $244 in early trading Monday.

Write to Al Root at [email protected]