Buy and Hold Caterpillar Poised to Gain Further on AI Data Center Boom

U.S. industrial and manufacturing stocks are seeing a massive price surge from the artificial intelligence (AI) data center boom. Heavy machinery giant Caterpillar Inc. CAT is one of them. The company has been benefiting from broad demand across construction, mining and power markets, with rising sales to users and a record backlog.

CAT’s order backlog reached a record $72 billion at the end of second-quarter 2026, up 92% year over year. All three primary segments contributed to the increase, and 59% of the backlog is expected to be delivered over the next 12 months.

Growth Through AI-Driven Data Centers 

Caterpillar is gaining from rising AI data-center-related power demand. As big technology companies establish data centers globally to support their generative AI applications, CAT is witnessing robust order levels for reciprocating engines for data centers.

CAT expects full-year 2026 power generation growth in both reciprocating engines and Solar Turbines as cloud computing and generative AI support data-center build-outs. The company continues to add capacity against this multi-year opportunity. 

CAT’s long-term plan calls for large reciprocating engine capacity nearly three times the 2024 levels and Power Generation sales more than three times the 2024 levels by 2030. It is also restarting a 10-megawatt gas reciprocating engine platform, adding about 1.5 gigawatts of capacity with shipments expected from fourth-quarter 2026.

Product Innovation 

Caterpillar continues to invest in digital capabilities, connected assets, services and more productive equipment to deepen customer relationships beyond new-machine sales. The company targets services revenues of $30 billion by 2030, up from $24 billion in 2025. 

CAT is also extending its digital and AI capabilities through Cat AI Assistant, its expanded collaboration with NVIDIA Corp. NVDA, RPMGlobal and Skycatch. These initiatives add software, spatial analytics and AI tools that can improve equipment interaction, mine planning and operating decisions. 

Near-Term Catalyst

U.S. industrial firms are profiting immensely through increased demand for electrical grid equipment, advanced cooling systems, and specialized semiconductor packaging. The stock price of Caterpillar has surged 36% year to date buoyed by massive power demand for AI data centers. 

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Demand for these products is likely to remain buoyant as four major hyperscalers raised their AI capital expenditure budget to $750 billion for 2026 from $670 billion estimated earlier. This figure is set to cross $1 trillion next year and rise further beyond 2027. 

CAT currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Strong Guidance 

Looking to third-quarter 2026, management expects strong growth in sales and revenues compared with the year-ago period. Tariff costs are expected to be in line with the year-ago quarter. CAT anticipates the adjusted operating margin to be higher year over year in the third quarter. The adjusted operating margin was 17.5% in the third quarter of 2025.

For 2026, management expects sales and revenues to grow in the mid-to-high teens. Adjusted operating margin is projected near the bottom of its target range, excluding tariff recoveries. Machinery, Power & Energy (MP&E) free cash flow is expected in the top half of the company’s target range. 

Solid Estimate Revisions

Caterpillar has an expected revenue and earnings growth rate of 16.6% and 42.4%, respectively, for the current year. The Zacks Consensus Estimate for the current year’s earnings has improved 9.1% over the last 30 days. 

CAT has an expected revenue and earnings growth rate of 10.7% and 20.8%, respectively, for the next year. The Zacks Consensus Estimate for next year’s earnings has improved 0.2% over the last seven days.

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Robust Price Upside Potential

The short-term average price target of brokerage firms represents an increase of 29.6% from the last closing price of $779.16. The brokerage target price is currently in the range of $882-$1,225. This indicates a maximum upside of 57.2% and no downside. 

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This article originally published on Zacks Investment Research (zacks.com).

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