What Every Caterpillar Investor Should Know Before Buying
Key Points
Management recently upgraded its guidance in an investor day presentation.
Caterpillar's power and energy businesses support the operation of artificial intelligence (AI)/data centers.
The stock remains cyclically exposed, and management's guidance reflects that.
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As counterintuitive as it might sound for a company that's ostensibly in the "old economy," the reality is that Caterpillar's (NYSE: CAT) stock is being supported by optimism over its long-term exposure to the artificial intelligence (AI)/data center investment theme. That's fine if you are looking for exposure to the theme, but you will need to balance that view with an overall appraisal of the stock's prospects.
Caterpillar's AI/data center exposure
It's telling that the first segment discussed in Caterpillar's recent investor day presentation was its new power and energy segment. It's simply the old energy and transportation, but without the rail division, which, as of 2026, will be under the resource industries (mining and aggregates machinery).
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This is a move designed to allow the power and energy segment's (engines, generator sets, and industrial gas turbines) leadership to focus on the growth opportunities ahead. The most exciting of these come in three buckets, and they all relate to AI-led demand for data center capacity and power:
- Caterpillar provides primary and backup power equipment to support data centers.
- Storage and generator systems to support the stability and distribution of the electricity grid.
- Gas turbines, engines, and equipment to support upstream, midstream, and downstream natural gas operations.
Management is excited by the growth opportunity, and it has good reason, because the energy and transportation segment generated the most significant sales and profit of its three equipment segments in the third quarter.
|
Segment |
Sales |
Growth |
Segment Profit |
Growth |
|---|---|---|---|---|
|
Energy and Transportation |
$8.4 billion |
17% |
$1.68 billion |
17.1% |
|
Construction Industries |
$6.76 billion |
7% |
$1.38 billion |
(7.3)% |
|
Resource Industries |
$3.11 billion |
2% |
$0.5 billion |
(19.4)% |
Data source: Caterpillar presentations.
Caterpillar upgrades guidance
The growth potential in its power and energy segment helped give management the confidence to upgrade its medium-term targets in the investor day presentation.
Management tends to guide within wide medium-term ranges to reflect the traditional cyclicality of its sales, which, for example, can fluctuate with the construction and mining investment cycles, depending on interest rate movements and commodity prices.
Still, the strength in its growth prospects is reflected, most notably, in the increase in its free cash flow (FCF) guidance through the cycle.
|
Caterpillar Metric |
Current Targets |
New Targets (2024-2030) |
|---|---|---|
|
Sales growth |
N/A |
5%-7% compound annual growth |
|
Adjusted operating profit margin |
10%-14% ant $42 billion in sales, 18%-22% at $72 billion in sales |
15%-19% at $60 billion in sales, 21%-25% at $100 billion in sales |
|
Free cash flow |
$5 billion to $10 billion |
$6 billion to $15 billion |
Data source: Caterpillar presentations.
Caterpillar's valuation
But here's the thing: The current market cap of $259 billion implies that Caterpillar is priced between 43 times (at trough FCF) and 17 times (at peak FCF) throughout the cycle. Given that a steady, mature industrial stock might trade at 20 times FCF, Caterpillar's valuation appears to already incorporate optimism from the AI/data center theme.
It also appears that the market is assuming the other construction and resources industry segments will also have good outcomes in the coming years. It's something to consider for investors buying the stock at the current valuation.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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