Caterpillar's (CAT) conspicuous decline on Monday morning could be a key contrarian opportunity, according to analysts.
Shares of the Illinois-based industrial leader are having their largest one day drop in almost eight years on Monday morning, pushing market broader market lower alongside Nvidia (NVDA) . However, it might not be time to unload the stock from your portfolio just yet.
As the stock bottoms out to a forward P/E ratio below 10, far below the median for its peer group, the stock could actually be an attractive opportunity as estimates come down and the risk/reward for the stock skews more positively.
"I think this is a good thing," Jefferies analyst Stephen Volkmann commented on Monday morning's guidance in an interview with CNBC. "The buy side right now thinks all the numbers are too high, they all need to come down. This is going to do that, it's going to derisk the story and then people are going to feel like they can get back in. This is a very cheap stock."
He added that the company's financial standing supplements this view in a research note published just before the earnings conference call.
"Given the strong financial position and low valuation, the lower EPS bar may entice some investors, in our view," Volkmann advised. "The outlook incorporates favorable pricing, additional share repurchases and lower short term incentive compensation."
Nuveen Investments head of global equities research Stephanie Link concurred, citing management focus on financial stability amid cyclical shifts and macroeconomic pressures.
"The stock is extremely cheap," she said, highlighting the stock's high free cash flow yield, dividend yield, and low price-to-earnings as factors that could keep investors aboard. "They are a much stronger company than they have been in the past."
The factors highlighted by Volkmann and Link after the release add to the suggestions made by analysts ahead of the release on the expectedly light guidance.
"Once the guide is out of the way, we expect the stock to outperform relative to peers, given the robust catalyst path ahead (EPS revisions, China property stimulus, more aggressive capital return)," Deutsche Bank analyst Chad Dillard advised clients. "With a 4:1 positive risk/reward, the upside potential is significant and we would look to add to our position on any weakness."
He added that the stock is currently trading at multiples that are recession levels, an unworthy valuation in his view.
Of course, if Chinese trade tensions relax and renewed investment in infrastructure is put forth by the East Asian nation, an even brighter "blue sky" scenario could arise for the much-maligned manufacturing giant.
The analyst consensus remains a "Buy" on the stock with a $155.75 consensus price target, encapsulating the remaining confidence in the cyclical stock.
Still, the technicals are uncertain as to a bounce, as highlighted by Real Money's technical analyst Bruce Kamich.
"The daily bar of CAT was improving this month, but weakness Monday could be the start of a change in direction," Kamich warned in his pre-market column. "Because markets are forward looking I would not rule out that CAT comes back from a lower opening today. Let's not make a hasty decision."
At the very least, investors should await management commentary on global demand, pricing pressure, and the state of the cycle after last year's "high-water mark" first quarter.