Caterpillar Stock Gets Downgraded at Morgan Stanley. Why the Analyst Says ‘Sell.’

Morgan Stanley downgraded Caterpillar stock to Sell. (Justin Sullivan/Getty Images)

Caterpillar stock fell Thursday after Morgan Stanley advised investors to sell it.

Analyst Angel Castillo cut his rating to Sell from Hold, citing “steady deterioration” in company fundamentals. He expects profit margins and sales to fall in the second half of the year as nonresidential construction markets weaken.

Shares fell 2.4% to $417.36. The S&P 500 and Dow Jones Industrial Average fell 0.1% and 0.5%, respectively.

Castillo raised his price target, despite the ratings cut, to $350 a share from $283. Still, that’s well below current levels.

The stock might have been hit harder if investors hadn’t just heard from Cat.

On Tuesday, the company reported earnings per share of $4.62. Wall Street was looking for $4.89. It was a miss, but BofA Securities analyst Michael Feniger pointed out in a Wednesday report that signals about 2026 were important to investors.

“Peak pain” has been absorbed with tariffs and inventory destocking, Feniger wrote, adding he believes all three CAT segments shift into growth mode in 2026. Those three segments are essentially construction, mining, and energy. Feniger rates shares Buy and has a $495 price target for the stock.

Overall, 48% of analysts covering Cat stock rate shares Buy, according to FactSet. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. Castillo is the only Sell-rated analyst. On average, S&P 500 stocks typically have one or two sell ratings.

The average analyst price target is about $429 a share, up from about $403 at the start of August.

Lately, Cat stock has managed to shake off most of Castillo’s fears. Coming into Thursday trading, shares were up about 18% year to date and 31% over the past 12 months.

That’s despite the hit from tariffs, which raised second-quarter costs by about $350 million and are expected to remain a headwind for the remainder of 2025. Excluding tariff impacts, however, Cat expects second-half profit margins to increase year over year.

Cat reported second-quarter operating profit margins of about 17%. Excluding tariff impacts, second quarter margins would have likely been closer to 19%. Cat reported margins of about 19% in the second half of 2024.

Things haven’t been easy for Cat lately. Sales in 2025 are expected to be about $64 billion, down from roughly $65 billion in 2024 and $67 billion in 2023. Higher margins, excluding tariffs, are one bit of evidence that it is doing what it can.

Wall Street sees a sales bounce back in 2026, with revenue reaching about $68 billion.

Caterpillar was a Barron’s stock pick on Sept. 26, 2024, with shares at about $391.

Write to Al Root at allen.root@dowjones.com