(Bloomberg) — The hunt for winners in the artificial intelligence gold rush has landed on an unlikely target: old-line industrial equipment maker Caterpillar Inc.
The iconic American company, known for its yellow excavators and bulldozers, closed September at an all-time high as investors bet AI’s nearly insatiable demand for electricity will fuel orders for one of Caterpillar’s lesser-known products — power-generation turbines.
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AI initially fueled dizzying rallies in chipmakers and software firms. Then, as the power demands became clear, a boom in shares of utilities and builders of data centers. Now, investors are moving further afield in search of beneficiaries from the hundreds of billions of dollars flowing into the build-out of the AI economy.
“You just saw a market that was thirsty for non-Magnificent Seven winners regarding, effectively, the information economy or the digital economy,” said Brian Sponheimer, a portfolio manager at Gamco Investors Inc.’s Gabelli.
Shares of Caterpillar surged 14% in September, the best month since December 2023. The rally brought the stock’s year-to-date gain to 32%, far outstripping the 17% gain in the technology-heavy Nasdaq 100 Index and the 19% advance in the cohort of the seven top US tech giants.
The stock advanced another 0.8% on Wednesday, with investors seemingly unperturbed after news that Dutch pension fund ABP had sold a €387 million ($455 million) stake in the company amid backlash over links to Israel’s war in Gaza.
The surge wasn’t entirely predicated on Caterpillar’s turbines business. The shares had slumped after the company warned at the end of August that it expects tariffs to cost it as much as $1.8 billion this year, crimping profit margins. But the manufacturer has a record backlog of nearly $40 billion as of the end of June, softening the blow from higher costs for steel and aluminum. It also stands to pay lower taxes thanks to Congress’s spending bill. The Federal Reserve’s first rate cut this year helped, as well.
The September rally, though, gained momentum after Oracle Corp. delivered a unexpectedly robust forecast for its cloud computing business — a unit that will require massive amounts of electricity and processing power. To meet that kind of demand from the tech sector, investors are betting, Caterpillar’s turbines will be needed. The company’s shares jumped in eight of the nine trading sessions after Oracle’s forecast.
Data center exposure “is being recognized in the market at the same time that you have things like the interest rate cut, that is hopefully a catalyst for residential construction activity, commercial construction activity,” Oppenheimer analyst Kristen Owen said.
It’s not just Caterpillar’s turbines that are in demand thanks to AI. The company sells equipment used to mine the copper that’s needed for data centers, Owen said, while the firms putting up the buildings themselves will need more of Caterpillar’s construction equipment.
Bank of America cited Caterpillar’s data-center applications last week when it boosted the price target on the stock to $517 from $495, implying it will rise some 8% from where it closed on Tuesday.
Caterpillar does not break out results for the power generation business that it calls Solar Turbines, making it somewhat difficult for investors to assess. Bank of America analysts think the unit is “CAT’s highest margin product with a robust growth outlook.”
“CAT is predominantly known for construction and mining equipment, yet power is likely to be the driver of the next EPS upcycle and is least understood by investors,” analyst Michael Feniger wrote in a note.
Wall Street is watching to see whether margins suffer as the company deals with higher costs, Owen said. Inflation in other corners of the market may also pressure Caterpillar’s customers, she said.
The stock currently trades above Wall Street’s average price target, suggesting it’ll be hard to move higher from here. It’s valued at 23 times forward earnings, the highest valuation since 2021.
At the same time, that valuation looks like a discount compared to other companies seen as winners from AI power demand. For BofA’s Feniger, that’s a sign there’s upside to be had.
Among power-equipment companies, Vertiv Holdings Co. trades at 36 times earnings after its stock rallied more than 40% this year. GE Vernova Inc. commands a 53-times multiple after shares nearly doubled. Caterpillar also trades at a discount compared to some of the biggest AI players, such as Microsoft Corp. and Nvidia Corp.
The Wednesday trading debut of real estate investment trust Fermi Inc. suggested investors’ appetite for AI bets hasn’t waned yet. The Texas-based company, which has plans to build a huge energy and data-center campus, saw shares jump 55% in their first session.
“So much of the market is being driven by animal spirits as it relates to AI and data centers that stocks like Caterpillar can certainly be caught up in that positive feedback loop,” Sponheimer said.
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(Bloomberg) — The hunt for winners in the artificial intelligence gold rush has landed on an unlikely target: old-line industrial equipment maker Caterpillar Inc.
The iconic American company, known for its yellow excavators and bulldozers, closed September at an all-time high as investors bet AI’s nearly insatiable demand for electricity will fuel orders for one of Caterpillar’s lesser-known products — power-generation turbines.
Most Read from Bloomberg
AI initially fueled dizzying rallies in chipmakers and software firms. Then, as the power demands became clear, a boom in shares of utilities and builders of data centers. Now, investors are moving further afield in search of beneficiaries from the hundreds of billions of dollars flowing into the build-out of the AI economy.
“You just saw a market that was thirsty for non-Magnificent Seven winners regarding, effectively, the information economy or the digital economy,” said Brian Sponheimer, a portfolio manager at Gamco Investors Inc.’s Gabelli.
Shares of Caterpillar surged 14% in September, the best month since December 2023. The rally brought the stock’s year-to-date gain to 32%, far outstripping the 17% gain in the technology-heavy Nasdaq 100 Index and the 19% advance in the cohort of the seven top US tech giants.
The stock advanced another 0.8% on Wednesday, with investors seemingly unperturbed after news that Dutch pension fund ABP had sold a €387 million ($455 million) stake in the company amid backlash over links to Israel’s war in Gaza.
The surge wasn’t entirely predicated on Caterpillar’s turbines business. The shares had slumped after the company warned at the end of August that it expects tariffs to cost it as much as $1.8 billion this year, crimping profit margins. But the manufacturer has a record backlog of nearly $40 billion as of the end of June, softening the blow from higher costs for steel and aluminum. It also stands to pay lower taxes thanks to Congress’s spending bill. The Federal Reserve’s first rate cut this year helped, as well.
The September rally, though, gained momentum after Oracle Corp. delivered a unexpectedly robust forecast for its cloud computing business — a unit that will require massive amounts of electricity and processing power. To meet that kind of demand from the tech sector, investors are betting, Caterpillar’s turbines will be needed. The company’s shares jumped in eight of the nine trading sessions after Oracle’s forecast.
Data center exposure “is being recognized in the market at the same time that you have things like the interest rate cut, that is hopefully a catalyst for residential construction activity, commercial construction activity,” Oppenheimer analyst Kristen Owen said.
It’s not just Caterpillar’s turbines that are in demand thanks to AI. The company sells equipment used to mine the copper that’s needed for data centers, Owen said, while the firms putting up the buildings themselves will need more of Caterpillar’s construction equipment.
Bank of America cited Caterpillar’s data-center applications last week when it boosted the price target on the stock to $517 from $495, implying it will rise some 8% from where it closed on Tuesday.
Caterpillar does not break out results for the power generation business that it calls Solar Turbines, making it somewhat difficult for investors to assess. Bank of America analysts think the unit is “CAT’s highest margin product with a robust growth outlook.”
“CAT is predominantly known for construction and mining equipment, yet power is likely to be the driver of the next EPS upcycle and is least understood by investors,” analyst Michael Feniger wrote in a note.
Wall Street is watching to see whether margins suffer as the company deals with higher costs, Owen said. Inflation in other corners of the market may also pressure Caterpillar’s customers, she said.
The stock currently trades above Wall Street’s average price target, suggesting it’ll be hard to move higher from here. It’s valued at 23 times forward earnings, the highest valuation since 2021.
At the same time, that valuation looks like a discount compared to other companies seen as winners from AI power demand. For BofA’s Feniger, that’s a sign there’s upside to be had.
Among power-equipment companies, Vertiv Holdings Co. trades at 36 times earnings after its stock rallied more than 40% this year. GE Vernova Inc. commands a 53-times multiple after shares nearly doubled. Caterpillar also trades at a discount compared to some of the biggest AI players, such as Microsoft Corp. and Nvidia Corp.
The Wednesday trading debut of real estate investment trust Fermi Inc. suggested investors’ appetite for AI bets hasn’t waned yet. The Texas-based company, which has plans to build a huge energy and data-center campus, saw shares jump 55% in their first session.
“So much of the market is being driven by animal spirits as it relates to AI and data centers that stocks like Caterpillar can certainly be caught up in that positive feedback loop,” Sponheimer said.
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