10:47 AM EDT, 08/12/2024 (MT Newswires) -- Data center growth tailwinds to the earnings of Cummins (CMI) and fellow back-up power generator maker Caterpillar ( CAT ) are "underappreciated," Morgan Stanley said Monday.

The investment bank said the companies' power generation products that provide a source of back-up electricity for data centers "may be facing far more attractive backdrop than previously assumed" as demand for data centers continues to grow.

"We will be the first to admit that our estimates on [Caterpillar ( CAT ) and Cummins] focused on top-line and thus assumed data center-related growth was likely immaterial to total company sales," Morgan Stanley said in a note to clients. "As evidenced by both companies' 2Q results and raised outlooks, however, this failed to account for a number of factors that can have a compounding effect on the impact to the bottom-line."

Morgan Stanley raised its price target on the Cummins stock to $341 from $339 while reiterating its overweight rating. The brokerage also named the company as its top pick in machinery stocks, according to the note.

The firm raised its price target on the Caterpillar ( CAT ) stock to $349 from $327 while reiterating its equal-weight rating.

"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," the brokerage said.

Price: 293.35, Change: -0.62, Percent Change: -0.21