Shares of Caterpillar (CAT, Financial) fell sharply by 1.9% on Monday after Morgan Stanely downgraded it due to concerns over large inventories that will have to be restocked. This is a dramatic reversal from last month's record highs, which were driven by expectations associated with the recently unveiled China's housing market boost.
On last Wednesday, the stock fell 2% as Morgan Stanley downgraded the shares from equal weight to underweight while cutting the price target by $17 to $332. This implies a 16% decline from Monday's close of $393.95. This new target is significantly lower than the average estimate of $360.55 obtained from 11 analysts present in Visible Alpha.
The construction equipment sector of America pointed towards future trends predicted by Morgan Stanley, including signs of a de-stocking downturn. The analysts noted, "We now see rising evidence of a potential de-stocking downturn." They also pointed out that the channel inventories are bloated and pose a risk of earning downgrades for Caterpillar in the future, which in turn implies that going will get even more challenging for the firm.
This downgrade had arrived at a time when Caterpillar had been on high investor expectations due to possible benefits from the increase in China's housing as a result of Chinese government stimulus. The firm is a beacon for changes in economic activity, and a downgrade in outlook is especially significant for practicing investors and analysts, who formerly saw the firm as an embodiment of optimism.
