CAT Q3 Deep Dive: Data Center Demand, Tariffs, and Backlog Drive Outlook

Construction equipment company Caterpillar (NYSE:CAT) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 9.5% year on year to $17.64 billion. Its non-GAAP profit of $4.95 per share was 9.4% above analysts’ consensus estimates.

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

StockStory’s Take

Caterpillar’s third quarter was marked by strong sales momentum and a positive market reaction, with management attributing performance to robust demand across Energy & Transportation, Construction Industries, and Resource Industries. CEO Joseph Creed highlighted a 25% increase in Energy & Transportation sales, particularly driven by power generation for data centers and higher activity in oil and gas. The backlog grew substantially, underpinned by large orders in power generation and ongoing infrastructure projects in North America. Management noted that unfavorable pricing and higher tariffs were partially offset by increased volumes.

Looking ahead, management anticipates continued sales growth, especially due to sustained demand for power generation solutions related to data centers and cloud computing. Joseph Creed emphasized that the company’s record backlog positions it for long-term profitable growth, while cautioning that tariffs will remain a significant headwind. CFO Andrew Bonfield noted that mitigating actions and ongoing capacity expansion should support margins, but the impact of incremental tariffs will weigh on operating profit. Management is focused on executing capacity enhancements and leveraging service opportunities tied to new equipment sales.

Key Insights from Management’s Remarks

Management credited broad-based volume growth and a record backlog as key contributors to third quarter results, but also flagged tariffs and shifting price realization as major margin pressures.

• Data center-driven demand: Growth in Energy & Transportation was fueled by strong orders for prime power applications, particularly reciprocating engines used in data centers. Management cited this as a “great opportunity” for both equipment and long-term service contracts, with lead times for large turbines extending due to higher order rates.
• Tariffs pressured segment margins: Incremental tariffs impacted all three main segments and were a primary driver of margin contraction, especially in Construction Industries and Resource Industries. Management implemented “no regrets” cost actions and limited sourcing changes, but noted that longer-term supply chain adjustments require greater policy clarity.
• North America construction strength: Sales to users in North America outpaced expectations, with both residential and nonresidential activity performing well. Dealer rental revenues continued to grow, and infrastructure projects funded by federal programs provided a tailwind.
• Services expansion in Solar: The Solar business adopted a direct service model, allowing Caterpillar to capture more recurring revenue from installed turbines. Management expects this to support higher-margin service growth, especially as more prime power units are deployed.
• Autonomy and mining product adoption: Resource Industries saw healthy orders for large mining trucks and growing customer acceptance of autonomous solutions. While coal-related demand declined, high commodity prices supported ongoing capital discipline and investment in autonomy and advanced powertrains.

Drivers of Future Performance

Caterpillar’s outlook is shaped by persistent demand for data center power, ongoing tariff headwinds, and operational execution in capacity expansion and service growth.

• Data center and cloud power demand: Management expects sustained growth in power generation as data centers and cloud infrastructure require additional capacity. CEO Joseph Creed described feedback from large customers as “very positive,” and highlighted ongoing investment to expand production for reciprocating engines and turbines.
• Tariffs and supply chain adaptation: Tariffs are forecasted to remain a major cost headwind, particularly in Construction Industries. While some short-term mitigation steps have been taken, management indicated that longer-term supply chain shifts will depend on more stable trade policy. CFO Andrew Bonfield stated that the impact of tariffs will be “greater in the fourth quarter,” with cost reductions and sourcing changes limited by the complexity of Caterpillar’s global operations.
• Service revenue expansion: The company is focused on growing its services business, especially in Solar and prime power applications. Management believes that higher installed equipment volumes will translate into increased, higher-margin service opportunities over time, providing a buffer against cyclical equipment demand.

Catalysts in Upcoming Quarters

Looking ahead, the StockStory team will closely monitor (1) the pace of data center power demand and related backlog growth in Energy & Transportation, (2) progress on supply chain adaptation and cost mitigation in response to tariffs, and (3) continued service revenue expansion, especially in Solar and autonomous mining solutions. Execution on capacity expansion and service monetization will be critical to sustaining profitable growth.

Caterpillar currently trades at $585.11, up from $524.57 just before the earnings. Is the company at an inflection point that warrants a buy or sell? Find out in our full research report (it’s free for active Edge members).

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