Investing.com -- Baird upgraded Caterpillar (NYSE:CAT) to Neutral from Underperform on Thursday, raising its price target for the stock to $309 from $300 a share.
The firm cited key bearish drivers for the stock have now been largely priced in. The firm noted that earlier concerns over dealer destocking, margin compression, and segment mix have materialized, and investor expectations now reflect those risks.
“The fundamental catalysts warranting a negative view...are at this point baked into fundamentals and expectations,” Baird analysts wrote.
The firm had previously argued that a needed channel destock, unsustainable pricing-driven margins, and weakness in Construction Industries (CI) and Resource Industries (RI) would offset strength in Energy & Transportation (E&T), but now says these factors are evident in recent results and guidance.
Caterpillar’s first-quarter 2025 report and forward outlook supported the shift in sentiment. Baird observed that dealer inventory levels were more favorable than expected, and that demand, while still pre-tariff, was outperforming peers.
“Demand...is clearly better than expected,” the analysts noted, referencing strength in orders, backlogs, and retail sales.
One key positive was said to be the absence of large sequential dealer stocking in what is typically the heaviest inventory build quarter.
“The channel [is] already starting to look lean,” Baird said, adding that inventories are now only 9% above pre-COVID levels, while pricing contributes roughly 24% to that figure.
Although macroeconomic risks, especially for CI, still loom, Baird believes Caterpillar is positioned more defensively due to an elevated backlog.
“We would look to use any additional pressure from a macro/recessionary reset to get even more constructive on the stock,” the firm said.
Baird maintains a watchful stance, but now sees potential upside should further macro-driven weakness create an attractive entry point.
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