Story Stocks^®

Caterpillar (CAT +0.5%) is trading relatively flat after reporting its Q2 results this morning. This heavy construction equipment manufacturer fell short of EPS expectations, marking its second consecutive quarter of a double-digit EPS miss. Revenue declined slightly by 0.7% to $16.57 bln. Importantly, revenue exceeded analyst expectations for the first time in 5 quarters, and the yr/yr decline was less steep than in the previous 4 quarters.

• The decrease in revenue was primarily due to lower selling prices, which was partially offset by higher sales volume and financial product revenues. Additionally, CAT's profitability continues to be pressured by headwinds, with tariffs proving to be pretty significant. The net impact from tariffs was around the high end of CAT's estimated range of $250-350 mln. As a result, adjusted operating profit margin decreased 480 bps yr/yr to 17.6%, resulting in a 22% decrease in adjusted operating profit.
• CAT expects the net impact from incremental tariffs in FY25 to be around $1.3-1.5 bln. This number assumes a larger impact in Q3 and Q4 due to the timing of recent changes, and CAT notes that the headwind is likely to be larger in Q4 relative to Q3. CAT anticipates the Q3 headwind to be about $400-500 mln.
• What stood out to us was CAT's backlog. Backlog grew $2.5 bln sequentially to a record $37.5 bln, and saw increases across all three primary segments. Given the strength of the backlog, CAT expects FY25 revenue to increase slightly yr/yr.
• The Construction Industry (CI) segment continues to be a laggard. Sales fell 7% yr/yr to $6.19 bln primarily due to weak sale prices. Also, despite sales to users increasing, volume was slightly negative due to dealer inventory headwinds and prices being more unfavorable than CAT had anticipated. Its Resource Industries (RI) segment also struggled during the quarter, with sales decreasing 4% yr/yr and profit decreasing by 25%.
• That said, CAT's Energy and Transportation (ET) segment continues to be a bright spot. ET saw revenue increase 7% yr/yr, driven by higher sales volume and favorable pricing. Backlog growth was driven by robust order activity in power generation, oil & gas, and transportation. Power generation was particularly strong, with sales increasing 28% yr/yr. Encouragingly, Oil & gas sales increased +2% yr/yr, a nice acceleration from Q1, which was down -20% yr/yr.

We think investors were anticipating a challenging quarter from CAT heading into this report. The substantial tariff-related headwinds and continued weakness in its CI and RI segments are weighing on near term profitability. With that said, there are encouraging signs for investors, including the healthy backlog and continued strength in its ET segment. The stock sold off in early April when the reciprocal tariffs were announced but has been rallying since then. Not seeing much reaction to the report today as it more or less came in as expected.