The power generation business is valued higher than Nvidia and GE Vernova! Morgan Stanley: Caterpillar is seriously overvalued.

After Caterpillar’s stock price soared to a record high on the back of better-than-expected Q3 results, Morgan Stanley issued a warning: the market is now assigning a valuation multiple to the company’s power generation business far surpassing that of AI giant Nvidia and energy leader GE Vernova. This feverish sentiment has pushed the stock into a “perfect pricing” zone, where any disturbance could trigger a sharp correction. According to Wind Trader Desk, Morgan Stanley analysts said in a report on October 30 that, at the current price, the market is giving Caterpillar’s power generation business an EV/EBITDA (enterprise value/earnings before interest, tax, depreciation, and amortization) multiple of between 58 and 103 times. What does this mean? For comparison, energy peer GE Vernova’s valuation multiple is around 28, and the much-hyped AI chip giant Nvidia is only around 25. This means the market considers Caterpillar’s power generation business more valuable than the world’s top tech and energy companies in these segments. Analysts warn that to justify Caterpillar’s current price of $585, the market must accept one of two extreme scenarios: Either Caterpillar’s power generation business, which accounts for only about 12% of total sales, is trading at an even more expensive valuation than Nvidia and GE Vernova; Or the rest of the company’s traditional cyclical businesses (such as construction and resource extraction) have been pushed to “absurd levels” far above historical norms. Even under the most optimistic assumptions—assigning a 45x P/E ratio to Caterpillar’s power business (matching GE Vernova), the implied valuation for the remaining cyclical businesses (engineering machinery, resource industries, etc.) still reaches a P/E ratio of 28. Meanwhile, the adjusted operating margins for these segments have been shrinking quarter by quarter, with a nearly 100 basis point sequential decline in Q3: So either the market is paying a huge premium for the power generation segment, or re-rating cyclical businesses to absurdly high levels even as margins continue to shrink. Morgan Stanley estimates that even assuming a more than 30% annual compound growth rate for backup generator sales and more than 65% for main power solutions, and factoring in a 1.5 to 3x services multiplier effect, it would still be difficult to achieve the bulls' expectations of $20 billion in power generation business sales by 2027. The report suggests: On the data center theme, Cummins offers a more reasonable valuation and lower risk. The report maintains Caterpillar’s 2026 EPS forecast at $19.24, with a target price of $380 based on a 20x P/E ratio—which is already above the historical norm of 13-22.5 times, implying a potential 35% downside from the current share price. ~~~~~~~~~~~~~~~~~~~~~~~~ The above content is from Wind Trader Desk. For more detailed analysis, including real-time commentary and frontline research, please join [Wind Trader Desk Annual Membership]. Risk Warning and Disclaimer Markets carry risks, and investments should be made cautiously. This article does not constitute individual investment advice, nor does it take into account the special investment goals, financial status, or needs of particular users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular situation. Investing accordingly is at your own risk.