Caterpillar's AI Hype Masks Overvaluation and Margin Pressures

What happened

A Motley Fool article notes investor optimism for Caterpillar's earnings growth, citing AI data center demand for its power generation equipment. However, DeepValue's analysis reveals CAT's stock is priced for perfection at ~30x P/E and ~19x EV/EBITDA, over 140% above intrinsic value. Operational data shows 9M25 margins fell to 17.5% from 20.9% due to tariff-driven costs and weaker pricing, indicating near-peak earnings. The company faces late-cycle risks in private construction and mining, with management returning all free cash flow via buybacks and dividends, reducing financial cushion. Thus, the AI narrative fails to justify the premium, reinforcing a cautious stance.

Implication

CAT's elevated multiples reflect high expectations for sustained earnings, but margin compression and tariff headwinds suggest a reversion to mid-cycle levels is likely. The AI data center demand offers a long-term tailwind, but it's insufficient to offset immediate pressures like economic softening and cost inflation. With the stock trading far above intrinsic value, downside risk is substantial if earnings disappoint or the cycle turns. Management's aggressive capital return leaves little room for error, increasing vulnerability in a downturn. Therefore, new capital should wait for a valuation correction, while existing holders may consider trimming positions to manage risk.

Thesis delta

The AI growth story introduces a potential secular catalyst, but it does not alter the core thesis of overvaluation and cyclical vulnerability. Margin pressures and late-cycle indicators remain dominant near-term concerns, overshadowing long-term AI benefits. Consequently, the sell recommendation stands, with AI serving as a monitorable factor rather than a justification for current prices.