Caterpillar Inc. (NYSE: CAT) saw its shares climb 3.1% to $807.25 during late-morning trading on Thursday, recovering from a sharp 6.9% decline on Wednesday. The earlier sell-off followed a downgrade by Baird, which lowered its rating on the heavy-equipment maker to Neutral and slashed its price target from $1,200 to $900. Despite the bounce, the stock remains about 4% below its Tuesday close of $840.85.
Valuation Concerns Drive Downgrade
Baird's downgrade reflects growing unease over Caterpillar's valuation rather than any immediate weakness in demand. According to Barron's, the stock continues to trade at roughly 30 times projected earnings—nearly double its historical average. The revised price target implies an 11.5% potential gain from Thursday's session high, but it cuts about three-quarters of the upside Baird had previously suggested. This adjustment represents a multiple reset rather than a forecast of a collapse in earnings.
Data Center Growth Under Scrutiny
The downgrade is closely tied to concerns about the pace of data-center expansion, a key growth driver for Caterpillar's Power & Energy segment. In the first quarter, power generation accounted for about 16% of the group's revenue but drove 26% of annual sales growth. Within Power & Energy, power generation contributed approximately 78% of external sales growth, underscoring the segment's outsized role. However, Baird analyst Mig Dobre highlighted that a New York state directive issued on July 14 is now holding up permit applications for data centers with consumption capacity of at least 50 megawatts. In May, pending requests totaled nearly 12 gigawatts of load. This regulatory move could slow future investment, raise costs, and limit site availability, Dobre warned.
Regulatory Headwinds and Potential Offsets
The New York order introduces a partial offset: regulators may require dedicated power generation or storage for approved locations, which could increase the amount of onsite equipment needed for each project. Caterpillar supplies engines and turbines for both main and backup power, so this could boost content per site even as approval timelines lengthen. Still, broader permit restrictions may reduce orders in 2027 as new capacity comes online.
Valuation Positioned Between Machinery and AI Infrastructure
Caterpillar's current valuation sits between that of traditional machinery firms and dedicated data-center infrastructure providers. The stock trades at a trailing P/E of 40.2x, which is 19% higher than Deere & Co. (NYSE: DE) at 33.9x and 22% higher than Cummins Inc. (NYSE: CMI) at 32.9x. However, it remains roughly 22% below Vertiv Holdings (NYSE: VRT) at 51.4x, a pure-play data-center power and cooling company. This positioning reflects the market's mixed view of Caterpillar as both a cyclical machinery stock and an AI infrastructure play.
Supply Expansion and Order Outlook
Caterpillar is aggressively expanding its power-generation capacity, aiming to more than double sales by 2030 from 2024 levels. Large-engine capacity is set to double, and gas-turbine capacity is projected to increase 2.5 times. Baird expects robust order volumes through 2026, followed by reduced growth rates in 2027 and 2028, and has warned of a potential oversupply of power equipment later in the cycle. Investors will watch for updates on backlog and delivery schedules when Caterpillar reports second-quarter results before the U.S. market opens on August 4. Analysts currently project earnings of $6.22 per share on revenue of $19.3 billion, which would represent a 17% year-over-year increase, according to Investor's Business Daily.
Backlog and Key Risks
The company's backlog rose to $62.7 billion in the first quarter, close to 90% of annualized Q1 revenue. CEO Joe Creed described the record backlog as a strong foundation for continued momentum. Key risks include broader permit restrictions that could dampen 2027 orders, potential tariffs weighing on margins, and the possibility that on-site power rules may only partially offset slower approvals. Thursday's recovery leaves the valuation debate unresolved, with the next major catalyst coming on August 4 when earnings are released.
