Caterpillar stock could fall 25% says Baird and downgrades to Neutral

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Shares of Caterpillar (NYSE:CAT) are trading lower in pre-market Monday after Baird analysts downgraded the stock to Neutral from Buy.

The analysts argue that Caterpillar shares are “nearing a cyclical pivot point following strong recent outperformance,” hence they see risk to valuation. Caterpillar stock is up 3.3% year-to-date (YTD) based on Friday’s closing price.

“History shows that CAT’s relative stock performance is driven by four fundamental factors: dealer stocking impact on sales growth, backlog progression, price/cost spread (which drives forward margin expectations), and dealer retail sales. We believe all four elements are likely to become headwinds for future stock performance,” they wrote in a downgrade note.

The analysts also cut the price target to $230 per share from the prior $290. However, they see a risk that shares could drop to as low as $180-190. The midpoint of this range implies a 25% drop from Friday’s closing price of $247.67.

Caterpillar stock is down over 1% in pre-open Monday.