Melius returned to a bullish stance on Caterpillar (NYSE:CAT), upgrading the stock to a Buy and setting a price target of $500. The move reflects a sharp upward revision in long-term earnings projections, especially for 2027, driven by the growing role of Caterpillar's engine business in powering next-generation data centers.

This shift in outlook doesn’t rely on a rebound in traditional markets like construction or mining. Instead, it focuses on Caterpillar’s expanding presence in power generation—an area becoming increasingly critical amid the surge in demand from artificial intelligence infrastructure. The firm sees Caterpillar playing a more integral role in providing essential and continuous power, far beyond just backup systems, as the strain on the electrical grid intensifies.

Compared to peers enjoying rich valuation multiples, Caterpillar still trades at a more conservative level. But Melius now believes the company deserves a re-rating. Their $500 price target implies a 30% upside based on a 17x earnings multiple, reflecting confidence in the company’s potential to capture long-term growth in data center-driven power needs.