Global Infrastructure Expansion Will Drive Equipment Renewal Cycle

Key Takeaways

• Strong global infrastructure and energy demand, coupled with capacity investments, underpin Caterpillar's multi-year sales growth and margin expansion outlook.
  
• Sustained mining equipment demand, cost controls, and growth in high-margin services drive long-term profitability and free cash flow improvement.
  
• Exposure to tariffs, price competition, and geopolitical risks threaten Caterpillar's profitability, with persistent margin pressure and earnings volatility expected amid global uncertainty and shifting demand.

Catalysts

Manufactures and sells construction and mining equipment, off-highway diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives in the United States and internationally.

• Record backlog growth across all three primary segments, driven by strong global infrastructure demand (particularly in North America, Africa, and the Middle East), positions Caterpillar for above-trend sales growth in late 2025 and into 2026, supporting top-line revenue expansion.
  
• Robust order activity and continued demand from the data center (cloud/AI) buildout-especially in power generation-are driving capacity investments and throughput gains in Energy & Transportation, setting the stage for further sales and operating profit growth as new capacity ramps up over 2026–2027.
  
• Persistent underinvestment in global infrastructure-reflected in continued awarding of IIJA-funded projects and healthy regional construction growth-supports a multi-year replacement and upgrade cycle for Caterpillar's equipment, sustaining long-term revenue and margin potential.
  
• Ongoing secular demand for mining equipment is supported by elevated customer fleet ages, high utilization rates, and future expectations for critical minerals demand (driven by global energy transition), all of which underpin sustained aftermarket parts and new equipment sales growth.
  
• Operating leverage from continued execution on cost controls, combined with expanding high-margin services/aftermarket business and future tailwinds from greater manufacturing efficiency (as capacity investments are absorbed), should drive gradual improvement in net margins and free cash flow, especially as the industry normalizes post-tariff uncertainty.

Caterpillar Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Caterpillar's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.9% today to 18.2% in 3 years time.
• Analysts expect earnings to reach $13.5 billion (and earnings per share of $28.93) by about September 2028, up from $9.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2028 earnings, down from 20.8x today. This future PE is lower than the current PE for the GB Machinery industry at 24.7x.
• Analysts expect the number of shares outstanding to decline by 2.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.43%, as per the Simply Wall St company report.

Caterpillar Future Earnings Per Share Growth

Risks

• The imposition of significant new tariffs in 2025-anticipated to be a $1.3–$1.5 billion pre-tax headwind-presents a structural risk to margins and profitability. Uncertainty around trade negotiations and the potential for more permanent tariff structures could create ongoing pressure on Caterpillar's net margins until mitigations (such as supply chain shifts or pricing adjustments) are fully realized.
  
• Unfavorable price realization and the need to use aggressive merchandising/discount programs to spur sales have created headwinds in Construction Industries and Resource Industries segments, compressing operating margins despite flat or moderately growing sales. This reliance on price incentives to maintain volumes could limit Caterpillar's ability to expand margins in the face of cost inflation and competitive pricing pressures.
  
• The global business landscape remains highly complex and exposed to geopolitical risks-including escalating trade disputes and country-specific investigations (such as new Section 232 and Section 302 probes)-which could increase operating costs and disrupt global supply chains. These risks threaten revenue consistency and could force costly supply chain or footprint changes.
  
• Softer macroeconomic conditions and capital discipline among mining and construction customers, along with region-specific weakness (e.g., Europe, Latin America), have led to declines or slower-than-expected growth in key segments. Persistent softness, especially in new equipment sales or sectors like coal, could pressure top-line revenue growth and result in lower earnings momentum going forward.
  
• Ongoing global uncertainty around tariffs, pricing strategies, and competitive moves-including the potential for price wars or inability to recoup tariff costs through higher selling prices-could result in increased earnings volatility and continued pressure on Caterpillar's operating profit margins, especially if the competitive landscape shifts toward rental models or low-cost international entrants.

Valuation

• The analysts have a consensus price target of $453.41 for Caterpillar based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $507.0, and the most bearish reporting a price target of just $350.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $74.0 billion, earnings will come to $13.5 billion, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 8.4%.
• Given the current share price of $418.09, the analyst price target of $453.41 is 7.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.