Caterpillar (CAT) faces significant challenges in 2025, with Morgan Stanley lowering its Q1 and fiscal 2025 estimates due to a cautious outlook on pricing, continued dealer de-stocking, and "more modest" contributions from several business areas, with weakness in oil and gas, industrial, and transportation offsetting strength in power generation.

The company is "still priced for perfection," Morgan Stanley said in a note Friday, explaining the company's investment thesis will likely skew negatively during 2025, even if broader construction and resource-extraction markets show signs of improvement this year.

The firm lowered its Q1 and fiscal 2025 earnings estimates for Caterpillar, extending reductions into 2026.

The analysts cited a more cautious outlook for pricing, expectations for continued dealer de-stocking, and "more modest" contributions from the Energy & Transportation segment, where strength in power generation is expected to be offset by weakness in oil and gas, industrial, and transportation markets.

"Our view is it's far too early to discuss a trough," the analysts said, adding that "the only thing we can say with any degree of confidence is that 2024 marked the peak of the cycle for CAT's earnings."

While Caterpillar reported a $1.3 billion increase in its order backlog to $30 billion, Morgan Stanley analysts described this as "neutral at best," explaining that much of the growth was driven by power generation orders extending out to 2027 and offering little near-term upside for earnings. The analysts said that data center-related revenue remains too small to offset broader headwinds.

The analysts also expressed skepticism about the bull case for structurally higher margins, cautioning that further margin contraction due to pricing and volume pressures could weigh on Caterpillar's valuation and compress its earnings multiple.

The soggy outlook led the Morgan Stanley analysts to trim their price target for Caterpillar shares to $300 from $330 previously while reiterating their underweight rating for the stock.

Price: 374.48, Change: -0.50, Percent Change: -0.13