For most of its history, Caterpillar (NYSE:CAT) has traded like a cyclical machine maker, with profits that rise and fall with construction and mining. Lately, investors have been paying for it like a growth stock instead, at more than 29 times expected earnings.
The business explains part of that. Caterpillar builds the bulldozers, excavators, and haul trucks found on job sites and in mines around the world, along with engines, gas turbines, and locomotives. It sells that equipment through its dealer network, then keeps earning on parts, service, and financing for years afterward. Even with that steady aftermarket revenue and heavy industrial presence, the machinery giant doesn’t secure a spot among the 10 Best Undervalued Stocks to Buy in October. Has a company built on cycles found something steady enough to justify that price? The answer hinges on a part of the business that has little to do with dirt.
Data Centers Need Engines
Caterpillar’s edge has always been scale plus its dealers. Its machines work for years in punishing conditions, and the network that keeps them running is hard for rivals to replicate. That installed base throws off a long tail of parts and service revenue, and it keeps customers loyal when replacement time comes.
What’s changed is where the growth is coming from. In the second quarter of 2026, Power Generation sales climbed 29% to $3.10 billion, driven mainly by data centers buying large reciprocating engines and turbines. That puts Caterpillar in the same conversation as industrials riding the AI power buildout, even though it rarely gets labeled an AI play.
Records Across the Board
Total sales and revenues hit $20.5 billion in the quarter, up 24%. It was the first quarter in company history above $20 billion. Construction Industries sales jumped 35%, with North American sales up 50%, and Resource Industries grew 20%.
Profits outran sales, which is what pricing power looks like. Operating profit rose 50%, adjusted operating margin widened to 21.9% from 17.6%, and adjusted profit per share reached $8.17, up from $4.72. GAAP profit per share came in at $7.77. One caveat: operating profit included $392 million of expected recoveries on tariffs paid under the IEEPA, so that lift shouldn’t be counted on every quarter.
CEO Joe Creed pointed to strong order rates and a backlog growing across all three primary segments. Management kept returning cash too, buying back $6.5 billion of stock in the first half of the year. That pace puts Caterpillar among companies shrinking their share count fast.
Isn’t This Just a Peak?
That’s the bear case. Construction booms fade, mining budgets are famously lumpy, and data center orders depend on hyperscalers keeping their spending taps wide open. A 50% jump in North American construction sales can be read as strength, or as the kind of surge that tends to come before a cooldown.
Interest rates sharpen the risk. Expensive industrial stocks are sensitive to rising bond yields for two reasons: higher rates cool construction, and they shrink what distant earnings are worth today. Caterpillar shares that exposure with rate-sensitive power names like GE Vernova and Vertiv.
The counterpoint is that power generation doesn’t move like earthmoving. Data center power demand is tied to multiyear capacity plans, not housing starts. That won’t erase the cycle, but it could soften the next downturn.
A Premium With Conditions
Caterpillar trades at 29.43 times forward earnings, as of October 12, compared with a sector P/E of 18.88 and its own 5-year average of 19.93. Put simply, investors are paying far more for each dollar of expected profit than they typically have for this company, or for its peers. The growth outlook explains some of that gap. Earnings per share are expected to grow 19.18% in 2027, a pace that’s rare for a heavy-equipment maker. If that growth arrives on schedule, earnings would start catching up to the multiple, so the stock wouldn’t need to fall to close the gap.
But a premium like this leaves little room for a stumble. At these levels, the stock is priced as if the power boom keeps rolling and construction stays strong at the same time. Yet, despite expanding its heavy-duty power systems and electrification initiatives to capitalize on clean energy demand, the industrial titan falls outside the 10 Best Battery Stocks to Buy According to Billionaires. If you own the shares, a single quarter of slowing orders could pull the valuation back toward its historical range, even with the business still healthy. Hedge fund interest slipped slightly, with 84 funds holding the stock in the most recent quarter, down from 87 in the prior one. Short interest sits at 2.03% of the float, which points to relatively limited bearish positioning.
Priced for Continuity
The evidence suggests Caterpillar is becoming less cyclical than its history implies. It has record sales, wider margins, and a fast-growing power business tied to data center demand. But at 29.43 times forward earnings, investors are paying a growth-stock price for a company that still answers to construction and mining cycles. The setup suits long-term investors who believe data center power demand has years left to run and who can stomach volatility. A slowdown in Power Generation growth, or a backlog that stops climbing, would make that premium much harder to defend.
While we acknowledge the risk and potential of CAT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than CAT and that has 10,000% upside potential, check out our report about this cheapest AI stock.
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