Should You Buy, Sell or Hold Caterpillar Stock Post Q3 Earnings?

Core Insights - Caterpillar Inc. (CAT) reported a mixed performance in Q3 2025, returning to revenue growth after six quarters of decline, with revenues reaching approximately $17.6 billion, a 9.5% year-over-year increase, driven by strong volume growth across all segments [1][4][7] - The company faced rising costs due to tariffs, which pressured earnings, resulting in a 4% decline in adjusted operating profit to $3.05 billion and a decrease in adjusted operating margin to 17.5% from 20% [5][9] - CAT shares have gained 8.6% following the results, and the company has seen a 57% year-to-date increase, outperforming the industry [1][2] Financial Performance - Q3 revenues reached a record $17.6 billion, supported by a 10% increase in sales volume and a favorable currency impact of 1%, though partially offset by a 1.3% unfavorable price realization [4][7] - Cost of sales increased by 16% year-over-year, primarily due to higher manufacturing costs linked to tariffs [5][9] - Operating cash flow for the first nine months of 2025 was $8.15 billion, down from $8.64 billion in the prior year, with a backlog of $39.9 billion at the end of the quarter [8] Future Outlook - Caterpillar expects 2025 revenues to be "modestly" higher than in 2024, with net incremental tariffs projected between $1.6 billion and $1.75 billion [9][10] - The company maintains its revenue projection at $42-$72 billion, with anticipated margins between 10% and 22% [10] - Earnings estimates for CAT have been revised upward for both 2025 and 2026, despite a projected 16.26% decline in earnings for 2025 [13][14] Industry Context - The broader U.S. manufacturing sector has been contracting, with the ISM Manufacturing Index below 50 for eight consecutive months, indicating ongoing challenges [18] - Competitors such as Terex and Komatsu reported mixed results, with Terex showing a 14.4% revenue increase driven by acquisitions, while Komatsu's revenues declined year-over-year [16][17] Valuation and Investment Considerations - CAT is currently trading at a forward 12-month P/E of 26.87X, higher than the industry average of 24.57X, indicating a premium valuation [19] - The long-term growth outlook for Caterpillar is supported by expected increases in U.S. infrastructure spending and demand for mining equipment due to energy transition trends [21][22] - Investors are advised to exercise caution due to the premium valuation and projected earnings decline, while existing shareholders may benefit from the company's long-term demand prospects [23]