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Bull Trader USA

The Ratings Game: Caterpillar stock had a great October, and that earned it a downgrade

Shares of Caterpillar Inc. pulled back on Monday after UBS analyst Steven Fisher said he no longer recommended investors buy, as the potential for upside relative to downside risk is now “more balanced” after the stand-out performance this month.

The construction- and mining-equipment maker’s stock
CAT,
+1.02%

was down 1.1% in afternoon trading, putting it in danger of snapping a six-session win streak in which it ran up 21.5% to close Friday at a 4 1/2-month high.

The stock has still rocketed 32.2% in October, to make it the best performer among Dow Jones Industrial Average’s
DJIA,
+0.28%

components in the month. It was also headed for the best monthly performance since it soared 33.4% in July 2009.

Helping propel the stock this month was a big third-quarter profit beat, and the company’s assertion that customer demand remained, healthy, strong and robust.

UBS’s Fisher cut his rating on Caterpillar to neutral, after being at buy since October 2021.

“Our thesis on positive margin inflection is playing out, and we continue to see a positive trajectory for margins and earnings growth from here,” Fisher wrote in a note to clients. “However, with multiples compressing as interest rates rise, the valuation at this time presents a more balanced risk-reward dynamic in our view.”

Fisher lifted his base-case price target on Caterpillar’s stock to $230 from $225, but the new target implied just 6% upside from current levels.

His upside target amid a bull-case scenario is $253, or nearly 17% above current levels: “The bull case is that this is potentially the first of a few quarters in which CAT [Caterpillar] realizes outsized margin improvement driving consensus estimates higher, with multiyear growth still ahead,” Fisher wrote.

Meanwhile, while his bear-case target of $180 implies about 17% downside: “The bear case is that a global slowdown in growth leads to demand rolling over in 2023, pressuring commodity prices, CAT pricing and earnings,” Fisher wrote.

Caterpillar shares have gained 4.9% year to date, while the SPDR Industrial Select Sector exchange-traded fund
XLI,
+0.40%

has shed 10.7% and the Dow industrials have lost 9.7%.

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