According to a newly released research report, Morgan Stanley has sharply cut its price target on Caterpillar (CAT.US) from $915 to $675, concluding that the stock has formally shifted from an AI-themed valuation expansion into a phase of cyclical valuation correction.
While Morgan Stanley maintains its "equal-weight" rating and an "attractive" industry view, it states bluntly that the market had already priced the stock for perfection, leaving almost no margin for error, with the new target implying only about 4% upside.
Caterpillar's third-quarter results slightly beat expectations and full-year guidance was maintained, yet the stock still plunged 9.25% that day. AI sentiment had driven the shares to repeated record highs earlier this year, and Morgan Stanley attributes the turn to three key factors.
First, orders declined sequentially. Third-quarter order intake was approximately $25.6 billion, down about 11% quarter over quarter and significantly below buy-side expectations of over $29 billion, intensifying fears that earnings have peaked.
Second, results and guidance came in weak. Weighed down by manufacturing costs and inflationary pressures, third-quarter results and fourth-quarter guidance fell slightly short of expectations. Morgan Stanley lowered its fourth-quarter EPS forecast from $7.59 to $6.39, its full-year 2026 estimate from $28.38 to $27.24, and its 2027 estimate from $33.22 to $31.49.
Third, the construction industry is destocking. The company cut its construction industries (CI) outlook, with fourth-quarter dealer destocking expected to reach nearly $1.6 billion, above the previous estimate of $1 billion.
Notably, Morgan Stanley had previously flagged two major downside risks: doubts about the durability of the data center power generation equipment cycle, and more severe destocking in the construction industry. Both risks are now materializing one by one, pushing the stock into a correction.
By segment, the resource industries (RI) business benefited from favorable price realization, with both revenue and margins revised upward; power and energy (P&E) revenue was slightly lowered; and construction industries (CI) came under pressure from destocking, with its fourth-quarter operating margin forecast cut by about 318 basis points.
On valuation, the new target price is based on 21.5 times 2027 EPS, which Morgan Stanley calls a "cycle-top-to-bottom" valuation, compared with a historical forward P/E range of 11 to 22 times. The previous $915 target was based on a multi-stage growth DCF under a "what you need to believe" framework, assuming an 8% sales CAGR from 2025 to 2030, which was already "no easy feat." Morgan Stanley expects the stock to trade in a $550 to $800 range over the medium term.
That said, the bank is not downgrading the stock to "underweight" for three reasons: the shares have already pulled back about 40% from their all-time high of $1,073; orders may have peaked but remain solid, with no major cancellations; and the company's abundant free cash flow can support the stock through buybacks.
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