America's industrial giants are getting a boost from the AI build-out that remains in its 'early stages'

AI euphoria has driven the stock market to record highs this year.

But investor enthusiasm has not been isolated to the Big Tech companies making high-tech chips and futuristic chatbots, which, to many, define the AI boom. America’s heavy industry has also now been swept up in the fervor.

The latest example is Caterpillar (CAT). The industrial giant this past week reported that its power generation machinery brought in the biggest sales jump on the quarter. Caterpillar stock rose more than 11% following the results.

The company saw strong demand across its business lines, with an especially healthy outlook on infrastructure for AI data centers and the power needed to operate those assets.

The data centers used to train and run AI models require an immense amount of energy to operate for an already overstressed US power grid.

That has increasingly prompted developers to build their own power generation assets rather than wait in what can be a years-long queue for connection to the electric grid — the bread and butter of companies like Caterpillar.

Meta (META), for example, has published plans to power its massive data center campus in Richland Parish, La., at least partially with on-site natural gas turbines.

Reciprocating engines, which can be used as a backup power source for data centers if grid-provided electricity falters or as a primary source of power, notched the biggest jump in sales throughout Caterpillar’s business for third quarter, with a 33% increase year-on-year, CEO Joe Creed said on the earnings call.

Caterpillar only sees demand for power generation growing further as the AI build-out continues, Creed said.

“I think we’re at the early stages of the prime power opportunities, so we’re excited to have more of those come online,” Creed said. “So we have great confidence in the pipeline that’s out there, and that’s why we’re putting the capacity in, and we continue to raise the capacity.”

Caterpillar reported adjusted earnings per share (EPS) of $4.95 on $17.6 billion of revenue. Analysts were expecting EPS of $4.52 on $16.7 billion of revenue.

A day after Caterpillar’s earnings print, Bank of America analysts boosted their price target for the company’s shares to $650 from $594.

Cars drive past data centers that house computer servers and hardware required to support modern internet use, such as artificial intelligence, in Ashburn, Va., on July 16, 2023. (AP Photo/Ted Shaffrey, File) · ASSOCIATED PRESS

The data center buildout has been a boon for industrial companies writ large.

The Industrials (XLI) sector as a whole is up roughly 18% on the year, just slightly outperforming the S&P 500’s (^GSPC) 17% rise, for which the AI boom is also largely responsible.

Fellow industrial giant Honeywell (HON) also cited demand for data centers as a bright spot on a strong third quarter earnings print last week.

“We are well positioned,” Honeywell vice president of investor relations Sean Meakim said on the company’s earnings call. “I remain confident that data center end market growth, which is occurring, will certainly have building automation business as a vector to maintain their growth momentum.”

Honeywell reported adjusted EPS of $2.82 on revenue of $10.4 billion. Analysts were expecting EPS of $2.57 on revenue of $10.2 billion.

The Energy (XLE) sector has also similarly benefited from Big Tech’s increasing appetite for power.

For an oil and gas industry that has largely spent the year floundering as prices have fallen and margins have thinned, the booming need for on-site natural gas power has breathed new life.

For the country’s electric and utility companies, the boom has meant nearly endless requests for new grid connections and power sources — even if the build-out is moving precariously fast.

NextEra Energy (NEE), one of the largest electric power companies in the country, cited AI in its third quarter earnings as a key demand line. NextEra builds and operates power generation assets and other energy infrastructure.

The company reported adjusted EPS of $1.13 on revenue of $7.9 billion. Analysts were expecting EPS of $1.02 per share on revenue of $8.1 billion.

“Hyperscalers, data center operators and load serving entities continue to tell us they need solutions for large load today and tomorrow to address growing energy demand across America,” NextEra CEO John Ketchum said on the company’s earnings call on Wednesday.

In 2024, in collaboration with Microsoft (MSFT), a leading Big Tech hyperscaler, Caterpillar successfully demonstrated that its hydrogen fuel cells can be used to power data centers. Earlier this year, Caterpillar signed a deal with energy infrastructure provider Hunt Energy that will see the industrial giant “leverage its diverse portfolio of power solutions” to design systems for data centers.

Conversations between Caterpillar and its hyperscaler and other large data center customers about demand forecasts give the company “great confidence in the pipeline that’s out there,” Caterpillar CEO Creed said.

“We’re definitely really excited about the prime power opportunity with data centers and more broadly, just the demand for power that data centers and broader trends in the industry are putting on to the grid,” he said. “We’re going to see a lot more of this, I believe.”