Morgan Stanley names a back door pick to play AI data center buildout

Cummins should see more earnings upside as data center demand for backup power supplies remains strong, according to Morgan Stanley. Analysts led by Angel Castillo named Columbus, Indiana-based Cummins a top pick and reiterated an overweight investment rating. Castillo also raised his price target by $2 to $341, implying 16% upside from Friday’s close. The analyst said data center-related growth was once thought of as immaterial to total sales for companies like Cummins and Caterpillar . But Castillo said second-quarter earnings showed there’s a compounding effect on the bottom line from this demand given benefits from strong pricing, mix and incremental margins, so that the profit impact is greater than the sales number. That should continue to make itself more apparent, he said, as the companies build out this business to meet interest for back-up power in data centers. “Combined with the companies’ investments to double capacity in the next 2-3 years, we think this offers more earnings upside than expected by the market over the next several years,” he said. Cummins is Morgan Stanley’s “preferred way to play this.” Castillo lifted his estimate for earnings per share to $20.05 from $19.92 in 2024 and to $25 in 2025, up from $24.23. That’s about in line with Wall Street’s consensus for 2024, but 2025’s figure is around 12% higher than other analysts expect. On top of data centers, Morgan Stanley also pointed to an improved view on the North American truck business cycle due to emission regulations and Cummin’s productivity initiatives. This can further add to the case for a compelling risk-to-reward ratio, Castillo said. Cummins shares were little changed in early trading on Monday, but have climbed almost 23% this year. CMI YTD mountain Cummins shares in 2024. Although Castillo called Cummins his favorite pick in the machinery sector, he also raised his 12-month Caterpillar price target by 7%, to $349 from $327 but reiterated an equal weight rating as part of the same call.