Caterpillar—A Hidden "AI-Powered" Concept Stock?

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Caterpillar, the industrial giant world-renowned for its heavy machinery, is being seen as a surprising beneficiary of the artificial intelligence boom.

According to a research report by BofA Securities on the 22nd, the market generally views Caterpillar as a manufacturer of excavators and mining trucks, but has severely underestimated its "hidden gem" in the Energy & Transportation (E&T) segment—its wholly owned subsidiary Solar Turbines.

The report states that amid limited grid capacity, Caterpillar's turbines and reciprocating engines are increasingly being used by data centers as backup or even primary power solutions, with the smaller, modular turbines providing shorter delivery cycles and meeting urgent market demand. Based on this, BofA reiterates its "Buy" rating for Caterpillar, raising its price target from $495 to $517. In pre-market trading, Caterpillar's share price was $472.1 per share, offering about 4.9% to 9.5% potential upside to the target.

For investors, a key near-term catalyst is the company’s upcoming Investor Day scheduled for November 4. At that event, new CEO Joseph E. Creed is expected to provide more details about this growth opportunity. BofA Securities believes that the market has yet to fully absorb the growth potential of this power generation business. Their analysis shows that this single segment alone could contribute $6 to $8 incrementally to Caterpillar’s earnings per share (EPS) over the next few years.

“Hidden Gem” in the Spotlight: Solar Turbines

For a long time, investors' perception of Caterpillar has mainly focused on its construction and mining machinery. However, BofA’s report points out that the company’s next profit growth cycle may be driven by the E&T segment, precisely the area investors understand the least. At the core of this segment is Solar Turbines, a wholly owned Caterpillar subsidiary.

Although its results are not disclosed separately in financial statements, BofA believes that Solar Turbines is Caterpillar's most profitable product line and is positioned at the intersection of the power, energy, and data center industries. Currently, the power generation business accounts for about 15% of Caterpillar’s total sales, but its compound annual growth rate is as high as 25%. According to public filings, several well-known projects—including xAI, Meta, and AI infrastructure developer Crusoe Energy—have begun to adopt Solar Turbines products.

Solar Turbines primarily manufactures industrial gas turbines with power outputs ranging from 1 to 39 megawatts (MW), and has a large after-sales service business. Based on historical data, BofA analysts point out that this segment enjoys extremely high profit margins and robust profitability. In 2009 and 2010, its profit margin exceeded 20%, and it demonstrated strong resilience during economic downturns.

Why Are Small Turbines So Favored?

The "electricity anxiety" of AI data centers is reshaping the energy solutions market, making smaller turbines an increasingly popular choice. According to BofA's report, this trend is being driven by several key factors:

Lengthy grid connection process: The approval and construction process for new projects to connect to the grid can take more than five years, while data center developers hope to be operational within 18 to 36 months. This turns on-site power generation from a "transitional" measure into a "necessary" one.Slow delivery of large equipment: Lead times for large turbines have stretched from a few years ago to five to seven years, unable to keep up with the rapid deployment needs of data centers. In contrast, wait times for smaller turbines like those from Solar Turbines are just 18 to 24 months.Modular advantages: Small turbines can be "stacked" in use, with capacity added in stages as the data center grows, to meet gradually increasing power demands. This deployment also has built-in redundancy and can serve as both primary and backup power sources.

The projects cited in the report illustrate this trend. According to tomshardware-tech industry, Elon Musk’s AI startup xAI installed Solar Turbines products at its Memphis campus to avoid lengthy grid connection queues. Additionally, Solar Turbines equipment appears at Meta's Socrates data center; Crusoe Energy's AI campuses developed for Oracle and OpenAI; and in Caterpillar’s cooperation agreements with Joule Capital Partners and Hunt Energy. Particularly, the newly launched Solar Turbines Titan 350 (38 MW) turbine is seeing strong demand for its higher power output, though orders are not yet fully open.

New Engine for Profit Growth & Potential Valuation Re-rating

BofA's report emphasizes that the market still primarily values Caterpillar based on its traditional machinery business, and has not fully reflected its growth potential in the power generation sector. The report shows that Caterpillar’s price-to-earnings (P/E) ratio is largely in line with its machinery peers (such as Deere, Cummins), but much lower than industrial companies benefiting from the power and data center themes (such as Eaton, Vertiv) and gas turbine peers (such as GE Vernova and Siemens Energy).

Analysts believe that as the power generation business accounts for a growing share of company profits, Caterpillar’s valuation has reason to be reassessed. Solar Turbines, as Caterpillar’s most profitable internal segment with a vast after-sales market, deserves a higher revenue multiple.

In its scenario analysis, BofA projects that just the data center and power generation segments could bring an incremental $10 billion in sales to Caterpillar, translating to an additional $6 to $8 EPS. The report further extrapolates that, considering growth potential across all business units, Caterpillar's next-cycle peak EPS could reach $41–45, far above the current market expectations.

Caterpillar will hold its first Investor Day in years on November 4, seen as a key catalyst by the market. At that event, new CEO Joseph E. Creed will present the company’s strategy to investors for the first time. Notably, Mr. Creed has long served as CFO of Caterpillar’s Energy & Transportation segment and has deep insight into this business.

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