On September 1, a caller mentioned that they do not know how to value Caterpillar Inc. (NYSE:CAT) amid the heavy artificial intelligence market hype and asked for a breakdown. Mad Money host Jim Cramer replied:
It’s funny you say that because isn’t it, if you repeat what you just said, isn’t that the problem? Since you don’t know what to value it, what do money managers do? They sell. And that’s what’s going on. They’re looking and say, “Oh, it’s at 28 times earnings. I’m used to trading at 16 times earnings. I don’t know if that’s right. Why don’t we sell it? We can buy it back.” And that is what you’re running into.
The AI Power Boom and Record Financial Momentum
Caterpillar Inc.’s performance highlights why many long-term investors remain firm despite the elevated valuation. The company recently delivered a blowout second-quarter earnings report, posting record quarterly revenue exceeding $20.5 billion and an adjusted EPS of $8.17 that comfortably beat Wall Street consensus estimates on both metrics. One of the primary catalysts behind this financial strength is the demand for power-generation equipment. Driven heavily by the rapid buildout of AI data centers requiring reliable backup and continuous power sources, the company’s power generation retail sales to users saw a staggering 72% year-over-year growth.
In addition, the company showed an all-time high order backlog of $72 billion and 59% of it is expected to be delivered over the next 12 months (from its earnings release in August). This massive cushion provides exceptional revenue visibility, protecting the machinery giant against near-term macroeconomic volatility while continuing to reward shareholders through aggressive share buybacks and a raised quarterly dividend of $1.63 per share.
Valuation Sticker Shock and the Institutional Multiple Dilemma
The bear case can be pointed to the multiple expansion highlighted by Cramer. Historically accustomed to trading at a price-to-earnings multiple closer to 16, Caterpillar Inc.’s ascent toward 28 times earnings has triggered significant institutional friction.
Skeptics argue that much of the cyclical upside is already priced in, leaving little room for error if macroeconomic conditions soften or if dealer inventory normalization continues to create choppy quarterly results.
When institutional money managers experience a traditional heavy machinery manufacturer priced like a high-growth technology stock, the reflex action is often profit-taking. This explains why the stock experiences sharp pullbacks even after reporting record-breaking results.
Wall Street Positioning and Closing Thoughts
According to Insider Monkey’s database tracking over 1,000 elite hedge funds, 84 hedge funds held positions in Caterpillar Inc. during the second quarter, down slightly from 87 in the previous quarter. On the short side, bearish positioning remains exceptionally low, with the short percentage of float sitting at 1.57%.
Caterpillar Inc. is caught between its old identity as a traditional machinery maker and its new role powering the AI boom. While high valuations are making short-term traders nervous, the core business is performing brilliantly, leaving Wall Street to decide if this higher price tag is here to stay.
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