Back on July 1, I covered Michael Burry’s first-ever bet against Caterpillar (CAT), a stock that had long been a darling to him.
He wrote that he had shorted it at $1,060.98, citing a trailing P/E of 53.03 and a forward P/E of 44.05, which he thought was too rich for a cyclical industrial company.
As a trader, I’ve learned not to confuse a stock’s strong run with a business that’s still attractively priced. Even a company delivering impressive results can become vulnerable when investors expect too much.
Burry’s valuation worry looks different now. After the third-quarter report on Oct. 29, 2026, shares fell 9.25% in a day and are 40% below the $1,073 peak, according to Yahoo Finance.
Yet the quarter looked strong. Caterpillar‘s Q3 earnings presentation shows that Sales rose 17% to $20.7 billion, adjusted profit per share jumped 45% to $7.20, and backlog hit a record $78 billion. Power and Energy sales rose 18% to $8.8 billion, due to data center and AI demand.
Our third-quarter results reflect the durability of our end markets, with strong order rates and a record backlog.
However, investors wanted more than a good quarter.
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In a note shared with me at TheStreet, Morgan Stanley kept an Equal-weight rating but cut its price target to $675 from $915, about 4% above the $647.39 close on Oct. 29.
Morgan Stanley said the two risks it flagged, the durability of the data center power cycle and construction de-stocking, have “reared their ugly heads.”
Three things hurt. Bookings fell about 11% from the prior quarter to $25.6 billion, short of the more than $29 billion big investors expected, feeding fears that orders have peaked. The fourth-quarter outlook came in modestly below expectations, partly on manufacturing and inflation costs, including $600 million in tariff costs.
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And Caterpillar now expects dealers to cut inventory by about $1.6 billion in the fourth quarter, up from $1 billion. De-stocking means dealers selling machines off their lots instead of ordering new ones.
Shares are still up 9.84% this year, 10.28% over one year, and 169.57% over three years, according to Yahoo Finance. Morgan Stanley’s point is that expectations ran above Caterpillar’s own long-term outlook, so the stock needed more beat-and-raise quarters, not a hint of lower estimates.
What’s driving Caterpillar’s mixed picture
Outside data fits the split. I looked at a survey by Associated Builders and Contractors conducted Sept. 21 to Oct. 5, 2026, and found its construction backlog indicator rose to 8.7 months, the highest since July 2025, driven by data center projects.
Caterpillar’s numbers show the same two-speed story. Construction sales rose 18% to $8.0 billion on solid North American demand, and Resource Industries sales grew 15% to $4.6 billion despite minor commissioning delays.
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A construction boom can look very different depending on where the money is going. A busy site doesn’t necessarily mean the whole industry is thriving. Caterpillar’s results show that distinction, with data center demand supporting growth while other areas face a tougher environment.
Morgan Stanley says backlog may be peaking, but remains robust, and it knows of no material cancellations. Earnings can keep growing even if inflated estimates come down. The company also keeps building.
Caterpillar committed $1 billion to a North Carolina investment and expanded engine capacity, while generating $4.4 billion in operating cash flow and returning $2 billion to shareholders in the quarter.
Morgan Stanley sees a range, not a collapse
The bank now values Caterpillar on a cyclical basis, at 21.5x 2027 earnings, near the top of its historical 11 to 22x range. It expects shares to stay between $550 and $800 for the medium term, slowly de-rating as earnings grow.
It cut 2026 EPS to $27.24 from $28.38 and 2027 EPS to $31.49 from $33.22. Fourth-quarter EPS falls to $6.39 from $7.59.
It stopped short of Underweight for three reasons. Shares are already 40% below their peak, backlog is robust, and strong free cash flow can fund buybacks that support the stock.
The bull case stays at $915 if growth and 30% incremental margins hold. The bear case is $450 if a U.S. slowdown and weak dealer restocking pressure margins.
As I wrote in July, Burry’s concern was valuation. Now, orders, dealer inventories, and data center power demand will help determine whether Caterpillar’s stock can hold its current range.
