Caterpillar Inc (NYSE: CAT)
I see cat has been on your hit list for quite a while. Just wondering your thoughts now after latest reports and price reductions please??
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Answer
Hi Greg,
A timely question, particularly with Caterpillar (CAT US) falling more than 5% on US mid-term election night. The weakness appears to reflect a combination of post-election factors:
- AI data centre uncertainty: Election-driven policy uncertainty around the pace of AI data centre construction, with the Democrats taking a considerably less accommodative stance towards the sector.
- Broader sector selling: Industrial and construction stocks have come under pressure, despite Caterpillar itself delivering a record quarterly result.
Importantly, while data centres are a key growth driver for CAT, the business is far from a one-trick pony. Its Q3 numbers were particularly impressive:
- Strong earnings beat: Q3 revenue surged 17% to US$20.68bn, operating profit jumped 38% to US$4.21bn and adjusted EPS rose 45% to US$7.20, ahead of market expectations.
- Record order book: Backlog nearly doubled to US$78.1bn, driven largely by demand for power generation equipment from AI data centres, providing excellent earnings visibility into 2027.
This was a genuine earnings beat, with adjusted EPS of US$7.20 coming in approximately 2% ahead of the Street consensus of US$7.10. More importantly, the record backlog points to considerable underlying demand durability.
However, a cautious outlook tempered the market’s enthusiasm. Despite the strong result, Q4 revenue growth is expected to moderate to the mid-single digits, while margins face pressure from approximately US$2.2bn in annual tariff costs. This helps explain some of the share price weakness.
That said, we question how sustainable these tariff-related cost pressures will be beyond the mid-term elections, particularly if the political environment shifts towards a more business-friendly agenda.
From a valuation perspective, the recent pullback is becoming interesting. The stock is now trading approximately 45% below its March all-time high, with its valuation around 20% below its five-year average. Against a backdrop of forecast EPS growth of almost 20% between FY26 and FY27, we believe the risk/reward is becoming increasingly attractive.
- MM remains bullish on Caterpillar below US$600.
