Caterpillar stock takes a hit after Baird turns bearish, in second downgrade in six weeks

By Tomi Kilgore

Baird's Mircea Dobre cut rating to underperform, after downgrading it to neutral in mid-February

Shares of Caterpillar Inc. fell Monday, after Baird analyst Mircea Dobre turned bearish, citing the belief the construction- and mining-equipment maker was nearing a "cyclical pivot point" that turns what used to be tailwinds to headwinds.

The stock (CAT) fell 0.8% in morning trading, and has shed 4.3% amid a four-day losing streak.

Dobre cut his rating to underperform, after downgrading Caterpillar to neutral on Feb. 14. Dobre lowered his stock price target to $185 from $230, with the new target implying about 15% downside from current levels.

He believes dealer stocking, which has been a tailwind to the construction- and mining-equipment maker's revenue growth, is set for "meaningful deceleration" in 2023 and 2024.

Dobre also expects the positive price/cost spread, or the difference between prices charged and the cost of sales will likely peak in the first quarter.

"[T]he positive gap will very likely diminish as pricing is starting to run into difficult prior year comparisons, note also that on the manufacturing cost side, several key inputs (plate, HRC steel) are once again turning higher limiting further cost downside into 2H23/2024," Dobre wrote in a note to clients.

He expects backlog, which was at near record levels at the end of 2022, to peak in the first quarter, as the pace of quarter-over-quarter growth has decelerated to about 1% in the fourth quarter, from 46% in the third quarter and 55% in the second quarter.

Dobre noted that backlog erosion has a "well-established history of driving subsequent stock underperformance."

And as Caterpillar increases the conversion of backlog to sales, dealer retail sales will "NEED" to accelerate, Dobre said, or excess inventories could build rapidly, which will then lead to production cuts.

But the fact that the stock's current price is "implicitly pricing in meaningful retail sales acceleration," Dobre believes there is room for disappointment as the economy, and therefore user demand, is likely to slow.

Basically, the four factors that have helped drive a TK% gain last year, while the broader stock market fell, "are likely to become headwinds for future stock performance," Dobre wrote.

Caterpillar's stock has lost 10.2% year to date, after rallying 15.9% in 2022. In comparison, the Dow Jones Industrial Average , of which Caterpillar's stock is one of the 30 components, has slipped 2.3% this year after falling 8.8% last year.

-Tomi Kilgore

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03-27-23 1137ET

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