Morgan Stanley: Caterpillar orders decline and dealer destocking deepens as Morgan Stanley cuts price target

What changed in the third quarter to weigh on expectations?

Caterpillar's third-quarter earnings per share were slightly above expectations, and the company reaffirmed its full-year 2026 outlook. Morgan Stanley noted, however, that some performance metrics and fourth-quarter guidance were slightly below expectations, partly because of manufacturing and inflation-related cost pressures.
New orders drew the most attention: they fell approximately 11% quarter over quarter to $25.6 billion, below the buy-side threshold of more than $29 billion expected before the quarter. This heightened investor concerns that the backlog and earnings were peaking.
The share price fell 9.25% on the day results were released. Morgan Stanley believes earlier AI-related expectations had driven the stock to a record high and that its valuation was already ahead of the company's own targets. As a result, results would need to consistently exceed expectations and the outlook would need to be raised to support long-term earnings expectations.

The company lowered its outlook for the Construction Industries segment and expects fourth-quarter dealer destocking of approximately $1.6 billion, above its previous estimate of $1 billion. Morgan Stanley accordingly lowered its fourth-quarter revenue and margin expectations for the segment.
The bank cut its fourth-quarter 2026 earnings-per-share forecast from $7.59 to $6.39 and its full-year forecast from $28.38 to $27.24; it also cut its 2027 forecast from $33.22 to $31.49.
The forecast revisions do not mean every business is weakening: the bank raised its revenue and margin expectations for Resource Industries because of favorable price realization, while slightly lowering its revenue forecast for Energy & Transportation.

Morgan Stanley believes the duration of the data-center power generation equipment cycle and the depth of Construction Industries destocking are replacing the AI theme as valuation focal points.
The bank changed its valuation method from a multistage discounted cash flow model to approximately 21.5 times forecast 2027 earnings per share, corresponding to a $675 price target, down from $915. It noted that the company's historical forward 12-month price-to-earnings multiple has ranged from approximately 11 to 22 times.
The bank maintained its Equal-weight rating and expects the share price to be roughly in the $550 to $800 range over the medium term. Earnings growth may offset a decline in the valuation multiple, but over time the multiple could retreat from the upper end of its historical range toward the lower end.

Morgan Stanley noted that although the backlog may be close to its peak, it remains substantial and the bank has found no significant order cancellations. Earnings could therefore continue to grow even if overly high earnings forecasts are revised downward.
The share price has fallen approximately 40% from its peak of $1073 per share. The company continues to generate substantial free cash flow, a significant portion of which can be used for share buybacks; the institution believes this can also provide some support for the share price.