Analyst Says Machinery Maker Caterpillar Isn't AI Darling
Shares Have Fallen More Than 6% From Late October High on Fears of Stretched AI Valuations
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Caterpillar Inc. was always an unlikely winner in the artificial intelligence craze. It makes the bulk of its money selling the equipment like yellow earth movers that has made it a stalwart of American industry.
But when one of its smaller businesses — backup generators — got a boost in orders from builders of the massive data centers that house AI servers, investors got starry-eyed about the stock’s prospects.
That’s too optimistic, according to Morgan Stanley’s Angel Castillo, the lone bearish analyst among 27 who track the stock, according to data compiled by Bloomberg.
The stock has surged 51% this year and now trades at 25 times its forward 12 month earnings. The market assumes Caterpillar’s construction business will rebound swiftly from a downturn — something Castillo said is not likely given the ongoing slump in nonresidential construction spending.
Investors think the power-generation business “will be so robust that it will more than offset any cyclical risk, that it’s just made it a more stable business,” Castillo said. “I worry that it will be robust but not enough to offset a lot of the other factors.”
The power business accounted for 15% of Caterpillar’s $17.64 billion in third-quarter revenue. The business grew 31% from a year earlier, but it’s still dwarfed by the construction segment’s sales of $6.76 billion.
Even in the power business, risks are starting to crop up as the AI trade falters. Investors have started fretting that the massive borrowing needed to build out AI capacity will crimp any future profits. Any slowdown in spending to alleviate those worries would hurt Caterpillar.
Castillo rates the stock underweight with a price target of $380, the lowest on Wall Street and some 30% below where it now trades. Among his peers in Bloomberg data, 14 give the stock a buy-equivalent rating and 12 say to hold.
Caterpillar shares have fallen more than 6% from a high in late October. The stock dropped as much as 2.5% on Nov. 18 as fears about stretched AI valuationscontinued.
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