AI is transforming this once boring blue chip stock. Is it a buy for 2026?

Caterpillar (CAT), with a market capitalization of $270 billion, manufactures and sells construction and mining equipment, off-highway diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives in the United States and abroad.

Founded in 1925, Caterpillar has spent decades building a reputation for bulldozers and excavators. The industrial giant is now well-positioned to benefit from the artificial intelligence (AI) megatrend, with its power and energy sector becoming its fastest-growing business sector due to the surge in demand for generators to power AI data centers.

Let's see if you should buy this blue chip stock with a wide AI moat.

Is Caterpillar a good stock to buy now?

Caterpillar is making its biggest bet on artificial intelligence in 15 years. The industrial giant announced it will spend $725 million to expand its Lafayette, Indiana, plant, more than doubling its turbine engine production capacity by the end of 2010. AI data centers require large amounts of energy to power generative AI models such as ChatGPT, and Caterpillar aims to benefit from increased demand.

CEO Joe Creed said the company has a better view of future demand than at any point in its 29-year career, thanks to long-term contracts and detailed forecasts from hyperscale customers building data centers. Caterpillar expects annual sales to grow 5% to 7% through 2030, up from an average of 4% in recent years.

According to the International Energy Agency, data center electricity demand is expected to triple by 2035. This is the equivalent of powering 15 pieces of computing infrastructure the size of New York City. Caterpillar operates across the value chain, from drilling for natural gas to burning it in the generators that power these facilities. The company already has frame contracts with key customers and a record backlog of orders, giving management confidence to invest heavily in new production capacity.

Caterpillar has signed an agreement with Joule Capital Partners to provide 4 gigawatts of power to its data center campus in Utah and a partnership with Hunt Energy to deploy up to 1 gigawatt of generation capacity across North America.

Generator businesses are attractive because they provide regular service income. A natural gas generator running 24/7 in a data center creates 40 times more service opportunities over its lifetime than a diesel backup unit.

Solar Turbines, Caterpillar's gas turbine subsidiary, is increasing its production capacity by 2.5 times to meet demand from data centers and oil and gas customers, which still make up half of the world's energy mix.

Caterpillar is not abandoning its core construction and mining business. The company announced plans to grow its services revenue to $30 billion by 2030 and expects to generate free cash flow of $6 billion to $15 billion annually. Management is committed to significantly returning all free cash to shareholders and increasing the dividend by high single digits each year through 2030.

Spending on AI infrastructure will approach $1 trillion annually by the end of the decade, and Caterpillar is putting itself at the center of building it.

What is CAT's stock price target?

Analysts tracking CAT stock predict its revenue to grow from $66.24 Billion in 2025 to $80.0 Billion in 2029. Adjusted earnings per share for the period are expected to expand from $18.65 to $43.10.

CAT stock currently trades at a forward P/E ratio of 28x, which is higher than its 10-year average multiple of 18.3x. Assuming a 20x earnings multiple, CAT stock should rise 50% from current levels.

Analysts also expect the company's free cash flow to increase from $8.41 billion in 2025 to $14 billion in 2029. The free cash flow expansion should help the industrial giant raise its annual dividend from $5.94 per share to $8 per share over the next four years.

Of the 23 analysts covering CAT stock, 13 have recommended a “strong buy,” nine have recommended a “hold,” and one has recommended a “moderate sell.” Caterpillar's average price target is $604.24, above the current stock price of approximately $577.

On the date of publication, Aditya Raghunath did not have any positions (directly or indirectly) in any securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see the Barchart Disclosure Policy here.