Caterpillar (CAT): A 6% Sell-Off Creates a New Buying Opportunity
Caterpillar (CAT) just gave investors another chance to buy into one of the strongest growth stories in the industrial sector. Shares fell 5.75% on Wednesday, October 7, closing at $813.83 as higher Treasury yields, broader weakness in industrial stocks and profit-taking weighed on the stock.
We recommended Caterpillar on September 25 because of its record backlog, strong earnings growth and expanding role in supplying power equipment for data centers. Those reasons haven’t changed. And after Wednesday’s sell-off, we think the stock deserves another look.
The decline comes after an impressive run. Caterpillar shares are still up more than 40% year to date and roughly 70% over the past twelve months. With that kind of performance, some profit-taking isn’t surprising, particularly when higher interest rates are putting pressure on industrial valuations.
But the underlying business continues to deliver.
When Caterpillar reported second-quarter results on August 4, revenue jumped 24% year over year to a record $20.5 billion, marking the first time quarterly sales exceeded $20 billion. Adjusted earnings reached $8.17 per share, comfortably beating expectations of $6.20 to $6.25.
Even more impressive, Caterpillar’s order backlog reached a record $72 billion, an increase of 92% from the previous year.
That backlog is one of the biggest reasons we’re still bullish. It provides substantial visibility into future revenue, and an increasing portion of demand is coming from power-generation equipment used in large data centers.
Caterpillar supplies the generators, engines and turbines needed to support these facilities. Earlier reports showed power-generation equipment sales to end users increasing more than 70%, and management has confirmed that turbine orders already extend into 2029 and 2030.
This is an important development for a company traditionally tied to the ups and downs of construction and mining. Demand for data-center power equipment gives Caterpillar another substantial growth opportunity, with orders already stretching several years into the future.
The strength isn’t limited to one business, either. Second-quarter growth came from all three major segments, Construction Industries, Resource Industries, and Energy & Transportation, as well as every major geographic region. Management subsequently raised its full-year 2026 sales outlook to growth in the mid-to-high teens.
Caterpillar is also investing to meet that demand. In late September, the company announced plans to spend approximately $1 billion expanding compact equipment manufacturing in North Carolina. It’s also increasing production of large engines and turbines while expanding the deployment of autonomous haul trucks at U.S. quarry sites.
So why did the stock fall nearly 6%?
The biggest concerns appear to be valuation and the broader economic environment rather than any sudden deterioration in Caterpillar’s business.
After its substantial rally, Caterpillar trades at a trailing price-to-earnings ratio in the mid-30s, above what investors have historically been accustomed to paying for a cyclical industrial company. Higher Treasury yields and uncertainty about the duration of the construction and mining cycle have also weighed on sentiment.
Those are legitimate considerations. But we think the company’s record backlog, strong earnings performance and expanding power-generation business help justify a premium valuation.
The recent pullback has also improved the potential upside.
The stock trades around $814 per share, while the average 12-month analyst price target is now near $1,000, according to Google Finance. That suggests approximately 23% upside from Wednesday’s closing price. Google Finance also reports a Buy consensus among 16 analysts.
From a technical perspective, the $800 level is worth watching. Shares traded as low as $806.29 on Wednesday, putting them close to an important support area. A sustained move back toward $850 to $900 could indicate renewed buying interest, while a break below $800 could lead to additional selling.
The next major catalyst will be Caterpillar’s third-quarter earnings report, expected in late October or early November, most likely between October 28 and November 4. We’ll be watching for updates on the backlog, power-generation orders, manufacturing capacity and the company’s full-year outlook.
There is still a risk that shares could decline further, particularly if interest rates remain elevated or the upcoming earnings report disappoints. But we don’t see anything in the latest developments that undermines our original investment thesis.
Caterpillar just delivered record quarterly revenue, has $72 billion in orders waiting to be fulfilled and is expanding production to meet demand that already extends into the end of the decade.
We recommended Caterpillar on September 25, and we’re reiterating that recommendation today. Wednesday’s nearly 6% decline has created a more attractive entry point into a business that continues to demonstrate strong growth and unusually good visibility into future demand.
For investors who missed our original alert, we think this pullback offers another opportunity to establish a position ahead of the company’s next earnings report.
