Does Caterpillar Stock Have More Upside?
Caterpillar (CAT) stock is at an interesting point right now. It has strong momentum, and if you bet on it, you are betting on a company with strong margin, good cash flow, low-debt capital structure, and good tailwinds. But is that enough?
Why Bet On CAT Now?
Caterpillar is capturing a new, high-margin, and structurally growing revenue stream from the urgent, non-discretionary buildout of AI data centers. This secular driver, evidenced by massive new orders and accelerating segment growth, provides a powerful offset to traditional cyclicality and supports a valuation re-rating.
- The Power & Energy segment’s power generation sales grew 44% year-over-year in Q4 2025, driven by AI data center demand.
- Caterpillar secured a 2-gigawatt generator order for a single data center campus, one of four such orders of at least 1 GW, demonstrating market leadership and scale.
- The company’s total order backlog reached a record $51.2 billion, up 71% year-over-year, providing significant revenue visibility and de-risking near-term forecasts.
How Do The Fundamentals Look?
- Long-Term Profitability: About 18.4% operating cash flow margin and 18.7% operating margin last 3-year average.
- Strong Momentum: Currently in the top 10th percentile of stocks in terms of “trend strength” – our proprietary momentum metric.
- Revenue Growth: Caterpillar saw revenue growth of 4.3% LTM and 4.6% last 3-year average, but this is not a growth story
- Room To Run: Despite its momentum, CAT stock is trading 3.0% below its 52-week high.
Below is a quick comparison of CAT fundamentals with S&P medians.
| CAT | S&P Median | |
|---|---|---|
| Sector | Industrials | – |
| Industry | Construction Machinery & Heavy Transportation Equipment | – |
| PS Ratio | 5.2 | 3.4 |
| PE Ratio | 39.5 | 25.0 |
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| LTM* Revenue Growth | 4.3% | 6.5% |
| 3Y Average Annual Revenue Growth | 4.6% | 5.5% |
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| LTM* Operating Margin | 16.5% | 18.8% |
| 3Y Average Operating Margin | 18.7% | 18.3% |
| LTM* Op Cash Flow Margin | 17.4% | 20.7% |
| 3Y Average Op Cash Flow Margin | 18.4% | 20.1% |
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| DE Ratio | 12.4% | 20.4% |
*LTM: Last Twelve Months
The Bear View & The Current Investment Debate
The current investment debate on CATis centered around: Can the massive $51B backlog and secular AI-driven Power & Energy growth offset the cyclical slowdown risks and immediate margin compression from tariffs and manufacturing costs?
The prevailing sentiment is neutral. The undeniable strength in the backlog and AI-related orders is being fully offset by tangible margin compression from tariffs. This conflict, plus an erratic forecasting record, mutes conviction.
| Bull View | Bear View |
|---|---|
| Record $51B backlog and accelerating Power & Energy demand for AI data centers provides a durable bridge over any cyclical weakness, ensuring strong future revenue. | Adjusted operating margin fell 270 bps YoY in Q4 2025 to 15.6%. This margin squeeze from tariffs is structural and will erode profitability despite backlog strength. |
You can evaluate more on which view to bet on by visiting CAT Investment Highlights & Full Analysis
CAT Is Just One of Several Such Stocks
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We chose these stocks using the following criteria:
- Greater than $2 Bil in market cap
- High operating or (cash flow from operations) margins
- Low-debt capital structure
- Strong momentum
A portfolio that was built starting 12/31/2016 with stocks that fulfill the criteria above would have performed as follows:
- Average 12-month forward returns of nearly 15%
- 12-month win rate (percentage of picks returning positive) of about 60%
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