Al Root

Wall Street recently got a look at Caterpillar's large-engine facility, a plant employing more than 2,000 people whose capacity it is aiming to double in the next three years, partly to meet demand for electricity from AI data centers.

The 1.3 million square-foot factory, in Lafayette, Ind., builds engines with horsepower ranging from 1,000 to 6,000. Those engines include generators that can provide the copious amounts of power artificial intelligence needs.

"The key driver is growing electricity demand catalyzed by rapid growth in Datacenters/AI, which also boosts demand for natural gas (production as well as transmission)," wrote Baird analyst Mig Dobre in a Thursday report. "For data centers, Cat's products are used for both primary and backup power."

Sales of equipment used in data centers flow into Caterpillar's energy and transportation business, which generated $28 billion in sales in 2024. That was approximately 44% of Cat's $64 billion in machinery-related sales last year.

"Global electricity demand is growing by 25% over the next 10 years," wrote Bernstein analyst Chad Dillard on Thursday, adding that the average data center size is 125 megawatts. Backup power systems typically cover 125% of capacity.

Higher, more efficient production means the segment could produce earnings per share of $6 to $7 by 2029, according to Dobre. That would represent 40% growth compared with 2024. Cat reported EPS of almost $22 a share in 2024.

He rates shares Buy and raised his target price to $422 a share from $395 after the visit.

The benefits won't show up immediately, however. "We think [this] is more of a 2027/2028 story than a 2025/2026 story," wrote Citi analyst Kyle Menges in a Wednesday report. He didn't change his rating or price target after the visit. Menges rates shares Buy and has a $370 price target for the stock.

Dillard appears to side more with Menges than with Dobre. "Cat is well-positioned to capture structural growth in energy demand," he wrote. Still, he rates Cat shares Hold and has a $304 price target for the stock.

Overall, 45% of analysts covering Cat rate the shares at Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. The average analyst price target for Caterpillar shares is about $367.

The future looks bright, but Wall Street sees a dip in profits this year as a result of weakening construction and mining markets. Cat is expected to generate operating income of about $11.4 billion in 2025, down from $13.4 billion in 2024.

Cat stock was up 0.5% in early trading at $361.61, following Dobre's price-target increase, while the S&P 500 and Dow Jones Industrial Average were up 0.4 and 0.3%, respectively.

Coming into Friday trading, Cat stock was down 1% year to date and up 9% over the past 12 months.

Write to Al Root at allen.root@dowjones.com

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June 20, 2025 09:46 ET (13:46 GMT)

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