🔍Stocks in Focus

Caterpillar (NYSE: CAT) is bulldozing its way to the data economy

by
Nathan Crooks
Quantfury Team
Caterpillar

Caterpillar Inc. (NYSE: CAT)—a leading manufacturer of mining and construction equipment famous for its bright yellow dump trucks, excavators and backhoes—is getting a boost from the data economy and showing just how much the digital sector is connected to the physical world.

The company’s CEO, Jim Umpleby, highlighted a confluence of factors that could fuel growth as tech giants rush to meet surging demand for cloud computing by constructing new data centers. Caterpillar’s heavy-duty machinery is a key component needed to build out any sort of industrial site, and the electricity all the new complexes will consume is also creating strong tailwinds for its power generation and grid businesses. 

“The data center build-out helps a whole variety of products across our portfolio,” Umpleby said during the company’s latest earnings call. “Power generation sales to users grew as market conditions remained favorable, including strong data center growth.”

Showing just how much the AI craze that first boosted shares of semiconductor makers like NVIDIA (NASDAQ: NVDA) is trickling down into other sectors of the global economy, Umpleby added that the company’s sales to mining companies could also be impacted positively as demand for raw materials used in power generation rises.

“Our customers use our products to produce the commodities to satisfy that increase in electricity demand,” he continued, noting the “copper (CME: HGZ4) and the other commodities that need to be produced.”

While Caterpillar’s revenue fell 4% in its latest quarter, the company’s shares have surged 33% year-to-date and are currently hovering near an all-time high. They’ve been boosted by “better than expected” improvements to operating profit margin, and that suggests any kind of eventual uptick in revenue will have an outsized impact on the bottom line. The importance of exposure to rising electricity demand was evident in diverging results seen by its competitors over the same period. Deere & Co. (NYSE: DE)—which makes agricultural machinery and heavy equipment—rose just 1%, while Cummins (NYSE: CMI)—which manufactures engines and power generation products—rose 37%. 

Caterpillar, meanwhile, bought back shares worth $1.8 billion in the second quarter, and it’s authorized another $20 billion for future repurchases which could further support the stock. Umpleby said the company was proud of its efforts to increase its dividend and pledged to keep returning nearly all free cash flow to shareholders.

The CEO also noted that the segments connected to the build-out of data centers, power generation, oil and gas and government infrastructure had not been as sensitive to interest rates. That means that other weaker segments may now be set for sunnier days after the US Federal Reserve began cutting interest rates last month.

“The parts of our business that are more interest rate sensitive, think about someone building possibly a warehouse in North America and needs construction equipment for that…Those kinds of activities do tend to be more interest rate-sensitive,” Umpleby said. “So if interest rates come down, that certainly has the possibility to improve that business.”

Investors quick to ride the AI wave have gone from investing in chipmakers to cloud computing giants like Microsoft (NASDAQ: MSFT) and then into actual power generators and data center operators. Caterpillar may be one of the next beneficiaries as the bonanza spreads further down the chain into heavy industry and mining, but the trend also shows just how much of the physical world economy could be exposed if what some think is a new tech bubble pops.