Caterpillar: Big Trouble In Little Peoria

Share of Caterpillar Inc. (NYSE: CAT) came under serious selling pressure Thursday after three federal agencies raided the company's corporate headquarters in Peoria, Illinois.

On Friday, Ross Gilardi of Bank of America offered his take on the situation.

For starters, Gilardi believes Caterpillar's stock will "stabilize" after Thursday's 4 percent decline but the report does create new uncertainty and create a pause in the investment case.

Gilardi said it remains "vague" what exactly authorities from the IRS, FDIC and Commerce Department are looking for. After all, the company has been cooperating with authorities since it received a grand jury subpoena in January of 2015, which requested documents and information pertaining to undistributed profits of non-US subsidiaries and the company's movement of cash across borders.

Related: 3 Federal Agnecies Raid Caterpillar Offices

Moreover, Caterpillar disclosed in February that the IRS proposed a $2 billion tax penalty. In fact, Caterpillar' stock shed $2 billion in value on Thursday so it's likely investors are now baking in this potential penalty into the company's valuation.

"While the company is a beneficiary of improving US construction trends and rising commodity prices that should help its mining business, this issue now becomes an awkward topic of conversation with investors that distracts from the cyclical merits of the investment case," the analyst concluded.

Instead, Gilardi is recommending investors buy shares of PACCAR Inc (NASDAQ: PCAR), which the analyst called a "best in breed" stock last year. The analyst is also recommending owning shares of Deere & Company (NYSE: DE) for exposure to the Machinery group.

Shares of Caterpillar remain Neutral rated with an unchanged $105 price target.