Morgan Stanley Picks Top Stock for AI Data Centers

Cummins Inc., based in Columbus, Indiana, is poised for increased earnings potential as demand for backup power supplies in data centers remains robust, according to a recent report from Morgan Stanley. Analyst Angel Castillo has designated Cummins as a top investment choice, maintaining an overweight rating and raising the price target by $2 to $341, suggesting a 16% upside from the stock's closing price on Friday. Castillo noted that the growth from data centers, previously considered negligible, is now showing a significant positive impact on profits due to strong pricing and improved margins. The second-quarter earnings report highlighted a compounding effect on Cummins' bottom line, indicating that the financial benefits from data center demand are outpacing sales growth. As the company expands its operations to cater to the increasing need for backup power in data centers, this trend is expected to become more pronounced. Castillo has adjusted his earnings per share estimates for Cummins, projecting $20.05 for 2024 and $25 for 2025, which aligns with Wall Street's consensus for 2024 but exceeds expectations for 2025 by approximately 12%. In addition to data center growth, Morgan Stanley has a favorable outlook on the North American truck business cycle, driven by new emission regulations and Cummins' productivity initiatives. This combination enhances the company's risk-to-reward profile. While Cummins shares remained stable in early trading, they have surged nearly 23% year-to-date. Castillo also raised the price target for Caterpillar by 7% to $349, maintaining an equal weight rating for that stock.