UBS upgrades Caterpillar stock to Neutral on lowered investor expectations

Investing.com -- UBS has upgraded Caterpillar (NYSE:CAT) shares from Sell to Neutral, highlighting a reset in investor expectations following two consecutive quarterly EBIT misses.

“After two consecutive quarterly EBIT misses, expectations for CAT have reset lower. With a reasonable initial 2025 outlook, we believe risk/reward is now balanced,” UBS analysts spearheaded by Steven Fisher said in a note.

Caterpillar’s Q4 results were disappointing, with sales, margins, and segment profits coming in below expectations across all three segments. Dealer sales to end users remained negative, and inventory reductions were steeper than the company had anticipated.

UBS noted that pricing pressures in Construction increased, contributing to a $300 million headwind in Q4 compared to $147 million in Q3, while oil and gas sales declined.

“The consecutive misses, and a cautious 1H25 message from CAT, has lowered investors’ expectations for 1H25 (consensus 2025 EPS lowered by 9% post-earnings),” analysts wrote.

UBS cut its earnings per share (EPS) estimate for 2025 to $19.95 from $21.25, reflecting “lower sales in CI and RI, and pricing/margin pressures.” The 2026 EPS forecast was also revised downward to $21.95 from $22.25, though UBS sees potential for a rebound.

“Looking back at our Sell rating, we think demand actually played out somewhat worse than we expected, but our pricing assumptions were too low, and we had not factored in enough market optimism on Fed rate cuts and a new administration,” the note continues.

UBS also raised its price target for CAT to $385 from $355, applying a 17.5x P/E multiple on its revised 2026 EPS estimate.

“With 1H25 largely derisked, and the potential for a return to double-digit EPS growth in 2026, we see risk/reward as balanced over the next year,” Fisher and his team said.

Despite the upgrade, UBS flagged potential risks, including further deterioration in pricing and a prolonged decline in oil and gas sales. However, with the weakest construction markets in Europe and Asia nearing a trough and US economic growth still healthy, the firm sees offsetting factors.