CAT Q2 Deep Dive: Tariff Headwinds Challenge Margins Amid Backlog Growth

Construction equipment company Caterpillar (NYSE:CAT) announced better-than-expected revenue in Q2 CY2025, but sales were flat year on year at $16.57 billion. Its non-GAAP profit of $4.72 per share was 3.7% below analysts’ consensus estimates.

Is now the time to buy CAT? Find out in our full research report (it’s free).

StockStory’s Take

Caterpillar’s second quarter reflected operational resilience, with flat year-on-year sales and revenue that slightly exceeded Wall Street expectations. However, non-GAAP profit per share was below consensus, and the company’s operating margin declined compared to the prior year, largely due to unfavorable price realization and the impact of tariffs. CEO Joseph Creed emphasized strong order activity and ongoing infrastructure and energy demand, noting, “Our backlog grew by $2.5 billion with increases across all three primary segments.”

Looking ahead, management’s outlook is shaped by persistent tariff pressures and optimism about sales momentum. Creed acknowledged that while tariff-related uncertainty remains, Caterpillar expects sales growth in the second half, supported by record backlog and continued infrastructure investment. The company anticipates incremental tariffs will be a more significant headwind for profitability, but is considering multiple mitigation strategies. As Creed put it, “We are considering all options to further reduce the impact of tariffs going forward.”

Key Insights from Management’s Remarks

Management attributed Q2 performance to strong demand in energy and construction, offset by tariff-related costs and pricing headwinds, while highlighting growing order rates and backlog as signs of underlying business momentum.

• Tariff headwinds pressured margins: Management cited incremental tariffs as a primary reason for the drop in operating profit margins across all segments, noting that tariffs reached the high end of their estimated range for the quarter and will intensify later in 2025.
• Energy & Transportation segment strength: Sales and profits in this segment were driven by robust demand for power generation, especially for data center applications, and growing industrial sales. Management highlighted continued investments to increase large engine capacity as a driver for future output.
• Construction Industries mixed performance: North America construction sales benefited from both residential and non-residential activity, but unfavorable price realization and lower dealer fleet loading weighed on segment margins. Attractive financing through Cat Financial stimulated sales, though at the expense of margin.
• Backlog reached a record high: The company’s backlog grew by $2.5 billion, reaching $37.5 billion, with strong orders across all three main business segments, supporting management’s optimism for the second half of the year.
• Dealer inventory and merchandising programs: Dealer inventory was flat sequentially, but management expects a net build in the second half. Sales merchandising programs, such as low-interest financing, helped drive volume but created headwinds for realized prices.

Drivers of Future Performance

Caterpillar’s near-term outlook centers on balancing resilient end-market demand with mitigating tariff-related profit pressures and managing evolving pricing strategies.

• Tariffs remain a major risk: Management expects incremental tariffs to continue weighing on profit margins throughout 2025, with the impact likely peaking in the fourth quarter. The company is exploring cost controls, supply chain adjustments, and potential pricing actions but emphasizes that uncertainty remains around the ultimate magnitude and duration of tariff pressures.
• Backlog supports sales growth: Record backlog and strong order rates across Construction, Resource, and Energy & Transportation segments underpin expectations for moderate sales growth in the second half. Management noted that increased infrastructure spending and data center-driven energy demand are particularly supportive.
• Pricing and merchandising strategy adjustments: The negative impact of sales merchandising programs on realized pricing is expected to lessen as the company laps prior-year initiatives. Management indicated that future pricing actions, including adjusting incentives and exploring dual sourcing, remain under consideration as levers to offset cost pressures.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be watching (1) the degree to which Caterpillar can mitigate ongoing tariff headwinds through cost controls or supply chain adjustments, (2) sustained growth in backlog and order activity across all major segments, and (3) the impact of evolving pricing strategies and merchandising programs on realized margins. Execution on planned capacity expansions, especially in power generation, will also be a key marker of progress.

Caterpillar currently trades at $413.05, down from $433.93 just before the earnings. Is there an opportunity in the stock?See for yourself in our full research report (it’s free).

High Quality Stocks for All Market Conditions

When Trump unveiled his aggressive tariff plan in April 2025, markets tanked as investors feared a full-blown trade war. But those who panicked and sold missed the subsequent rebound that’s already erased most losses.

Don’t let fear keep you from great opportunities and take a look at Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today.

StockStory is growing and hiring equity analyst and marketing roles. Are you a 0 to 1 builder passionate about the markets and AI? See the open roles here.