Caterpillar (NYSE:CAT) Doubles from April Lows, Can Earnings Momentum Keep Up?

Heavy Machinery, Heavier Expectations

Caterpillar (NYSE:CAT) has benefited from a strong set of growth catalysts, driving the share price up more than 100% from its April lows earlier this year. The rebound reflects renewed investor confidence, supported by infrastructure spending, resilient end market demand, and expectations that the company can navigate the current part of the cycle effectively.

That said, Caterpillar is a mature business, and this optimism comes despite a decline in top line revenue through 2024 and consensus expectations for further pressure in 2025.

The market is increasingly pricing in a turnaround, with forecasts now pointing to a return to high single digit growth over the next two years. We have begun to see this with the latest two quarters, with the Energy and Transport division driving growth. For investors, the key question is whether earnings recovery and margin resilience can justify the sharp re-rating following the recent rally.

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Caterpillar’s Energy Engine Roars

This optimism is largely driven by strength in Caterpillar’s Energy and Transportation segment, which delivered strong growth in the latest quarterly result. In the third quarter, total sales reached a record US$18 billion, supported by a record backlog of US$40 billion. While overall profitability softened slightly, this was largely due to higher costs associated with faster growing areas of the business. The Energy and Transportation division grew 17% year on year to US$8 billion, highlighting where demand remains strongest.

Management noted that higher manufacturing costs, likely linked to tariffs, were the primary factor weighing on margins. Even so, operating margins remained solid at 17%. Earnings per share came in at US$4.88, compared with US$5 in the prior period.

We view this as a short term cost headwind rather than a structural issue. The pressure appears tied to near term manufacturing and input costs rather than any lasting deterioration in Caterpillar’s competitive position or margin profile.

What do institutes and analysts have to say

Industry analysis and institutional commentary increasingly suggest that Caterpillar’s Energy and Transportation division is evolving from a traditionally cyclical industrial business into a more structurally driven energy platform.

Demand is being underpinned by long cycle themes such as power generation, energy security, and data centre related infrastructure, rather than short term economic swings alone. Management has also guided to a strong finish to 2025, with momentum expected to carry through into Q4, reinforcing the view that this segment is becoming a more durable earnings contributor.

Is CAT a buy or a sell

After such a strong run, the key question for investors is whether Caterpillar still offers an attractive entry point from a valuation perspective.

While sentiment remains positive, with 29 analysts rating the stock a Buy and an average price target of around US$589, the current share price of approximately US$577 suggests limited upside in the near term. This narrow gap leaves little margin for error should risks begin to materialise.

One such risk is revenue concentration in the US, which increases exposure to domestic macro conditions. Any slowdown in key demand drivers such as AI related capital expenditure or energy investment could weigh meaningfully on order intake and earnings momentum. From a valuation standpoint, a PEG style assessment shows both EBITDA and earnings trading at around 1.3.

For an industrial business with cyclical characteristics, a more attractive entry point would typically fall in the 0.8 to 1.0 range.

As a result, we believe Caterpillar’s growth outlook is largely priced in at current levels. While the long term fundamentals remain solid, the risk reward appears less favourable following the rally.

For investors who have benefited from the recent move, this may be an appropriate time to consider holding or taking profits, rather than adding new exposure at current valuations.