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Shares of Caterpillar Inc. fell Monday, after the construction- and mining-equipment maker was downgraded by a long-time bullish analyst who said he believes they are nearing a “cyclical pivot point” following their recent strong outperformance.
The stock
CAT,
fell 0.6% in morning trading. It was one of just 4 of the Dow Jones Industrial Average’s
DJIA,
30 components that were declining on the day. The shares, which had reached a record close of $264.54 two weeks ago, have run up 23.1% over the past 12 months, while the Dow has slipped 1.7% the past year.
Analyst Mircea Dobre at Baird cut his rating on the stock to neutral, after being at outperform for at least the past three years. He lowered his stock price target by 21%, to $230 from $290, with the new target implying about 6.6% downside from Friday’s closing price of $247.67.
Dobre said history showed Caterpillar’s relative stock performance was driven by dealer stocking, backlog progression, the spread between prices and costs that drive margins and dealer retail sales.
“We believe all four elements are likely to become headwinds” for the stock, Dobre said. While he lowered his price target to $230, he sees risk for valuation to contract toward the $180-to-$190 range, which implies 27%-to-23% downside. (Read about Caterpillar’s Q4 results, in which profits missed expectations.)
FactSet, MarketWatch
For one, Dobre believed dealer stocking, which has been a tailwind for revenue and the stock, was set for “meaningful deceleration.” He said dealer inventories have provided a growth tailwind for Caterpillar for eight consecutive quarters, while the longest stocking cycle over the past decade was nine consecutive quarters.
He also believed the price-cost positive spread, which has helped the stock outperform, will likely peak in the first quarter. “Going forward, the positive gap will very likely diminish as pricing is starting to run into difficult comparisons, while on the cost side several key inputs (plate, HRC steel) are once again turning higher,” which should limit margin improvements into the second half of 2023 and into 2024, Dobre wrote in a note to clients.
Dobre believed backlog will start eroding after peaking in the first quarter. The pace of backlog increases is clearly slowing, with fourth-quarter backlog up just 1% from the third quarter, and with order intake slowing while Caterpillar’s production is increasing.
And for dealer retail sales, the stock currently implies “meaningful retail sales acceleration,” but they have recently been subdued and there’s risk they could remain so.
“The gap between [Caterpillar’s] backlog and the dealers’ retail sales should give investors some pause, as [Caterpillar] increases their shipments/backlog conversion, dealer retail sales will NEED to accelerate significantly, otherwise excess inventories can rapidly build in the channel, which in turn will require production cuts in 2024,” Dobre wrote.
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