Shares of equipment maker Caterpillar are having their best day in 16 years. What does this have to do with AI?

Demand for power generating capacity and backup power for data centers soared revenue for heavy equipment manufacturer Caterpillar's Energy & Transportation segment. Generators outperformed the company's yellow excavators and drilling equipment in terms of demand growth. Caterpillar also beat Wall Street expectations for third-quarter revenue and earnings. That sent the stock up more than 12% in a day - to its all-time high.

Shares of heavy construction equipment maker Caterpillar jumped 12.1% to $588.2 in trading on October 29, hitting an all-time high. The growth of shares during trading on Wednesday turned out to be the largest since March 2009.

Shares soared after the company released its third-quarter report, in which it said generators and turbines that keep AI data centers running smoothly were the new driver of revenue growth. Sales in the Power Generation segment grew 31% in the latest quarter. That's much higher than traditional construction equipment. And it's further evidence of how the hype around AI, which helped Nvidia become the world's first $5 trillion-capitalized company, is strengthening the position of not only tech leaders but also "old industrial school" players, Bloomberg writes.

For Caterpillar, the boom in data center construction has fundamentally changed the role of the energy business. Previously, the Energy & Transportation segment, which is responsible for generators and related equipment, lagged behind other divisions of the company. Now it has become the largest and fastest-growing segment, accounting for about 40% of the company's total revenue in 2024. This segment also includes supplies of equipment for the oil industry and railroad transportation.

In its quarterly report for the third quarter, Caterpillar reported a 17% year-on-year increase in sales in the E&T segment, to $8.4 billion. Some analysts predict that revenue in this area in the coming years could double, or even triple, the agency writes.

Caterpillar's third-quarter revenue rose 9.5% from a year ago to $17.6 billion, while analysts surveyed by FactSet expected $16.8 billion, Barron's writes. Sales rose for the first time since the fourth quarter of 2023, when revenue began to decline amid a slowdown in the construction sector.

Adjusted earnings, on the other hand, fell 4.4% to $4.95 per share. However, this is still higher than Wall Street expected: analysts predicted earnings of $4.52 per share.

Construction equipment sales rose 7% year-over-year to $6.8 billion. This is a positive development: as Baird analyst Mig Dobre noted earlier, the residential construction market remains weak, but commercial construction has stabilized, Barron's writes. By comparison, sales in the construction segment totaled $6.2 billion in the second quarter, down 7% year-over-year.

Sales of mining equipment totaled $3.1 billion, up 2% from a year ago.

Caterpillar's operating profit in the third quarter amounted to $3.1 billion - almost $100 million less than a year earlier. This is due to the fact that the increase in costs due to duties partially offset the positive effect of increased sales volumes, the company said.

Caterpillar now expects revenue in 2025 to be "moderately" higher than in 2024. The previous forecast called for only a "slight" increase. At the beginning of the year, the company expected a "slight decline". At the same time, the Wall Street consensus already envisioned growth of about 2%.

"Order volume continues to grow: plus 25% year-over-year," Barron's quoted Raymond James analyst Tim Thain as saying. He noted that it was demand for power solutions that helped the company raise its full-year revenue outlook.

"It's a great illustration of how macroeconomic trends play out at the micro level," Michael O'Rourke, chief market strategist at JonesTrading, told Bloomberg. - It's widely known that building data centers for AI has been a key driver of economic growth this year. And that's clearly evident in Caterpillar's report on its Power Generation business."

In total, according to MarketWatch, of the 27 analysts tracking the heavy equipment maker's stock, 13 of them advise holding the stock in their portfolios (Hold), 12 advise buying (Buy and Overweight), and two recommend selling (Underweight and Sell). The Wall Street consensus price target is $505.1, down 3.7% from Tuesday's closing price.

This article was AI-translated and verified by a human editor