Why Is Caterpillar Stock Popping This Week?

Shares of Caterpillar (NYSE: CAT) are up almost 12% this week.

What's going on?

Well, the industrial and agricultural equipment manufacturer posted strong third-quarter earnings on Wednesday morning that blew past Wall Street expectations.

Revenue in the quarter rose 10% over the same period last year, to a record $17.6 billion -- Wall Street expected $16.8 billion. Better, adjusted earnings came in at $4.95 a share, beating Wall Street's expectation of $4.52 by about 10%.

And the company's backlog increased by $2.4 billion.

A new revenue stream

But there was something more to the release and earnings call that investors latched on to, driving the stock sharply higher in the hours after the report was released: The company suggested that the growth of artificial intelligence (AI) is now a significant contributor to its revenue growth. That was a bit of a surprise, because many investors associate Caterpillar with agricultural and basic construction activities and the associated equipment -- backhoe loaders, bull dozers, excavators, and the like.

Image source: Getty Images.

Sales in the company's energy and transportation segment, which includes generators, turbines, and similar equipment -- all essential to data centers and AI infrastructure -- jumped 17% in the most recent quarter. Power generation equipment in particular, a subsegment that is closely linked to data centers, recorded sales growth of 31% in the quarter.

And CFO Andrew Bonfield said on the earnings call that the company expects that acceleration in revenue to continue in the fourth quarter.

To be sure, Caterpillar is feeling the impact of President Donald Trump's tariffs, too. CEO Joseph Creed said he expects the full-year net impact from tariffs to be between $1.6 billion and $1.75 billion. But he added that the impact is "manageable."

More important, growing revenue from AI-related data centers was the highlight for Caterpillar's quarterly report. If the company can continue to nurture and grow that segment, there should be significant upside for this stock.

Matthew Benjamin has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.