Caterpillar Inc. (CAT) | The Buildout — AI Infrastructure
The Verdict
Caterpillar describes itself as the world's leading manufacturer of construction and mining equipment, off-highway diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. For the AI buildout, what matters is its Power & Energy segment, which makes reciprocating-engine generator sets, Solar Turbines industrial gas turbines and diesel standby gensets. Those supply prime and backup power to data centers. As grid interconnection queues stretch for years, developers are turning to on-site generation, and Caterpillar sells the machines that produce it. The company also runs a captive financing arm, Cat Financial, that funds equipment purchases and leasing.
| Market Cap | — |
| Revenue (TTM) | $74.7B |
| Revenue Growth | +18.4% |
| EBITDA Margin (TTM) | 20.7% |
| Net Debt | $38.4B |
| Earnings Beats | 4 of 7 |
| P/E (TTM) | — |
| EV/EBITDA (TTM) | — |
What We Like
- Power generation sales to users grew 72% in Q2 2026, accelerating from 48% in Q1 — the clearest read on AI-linked demand.
- Backlog reached $72 billion in Q2 2026, up about 92% year over year, with all three primary segments contributing.
- Large reciprocating-engine capacity is being raised from 2x to nearly 3x 2024 levels, adding about 15 GW of annual capacity.
- Management raised FY2026 sales-growth guidance twice in two quarters, from low double-digit to mid- to high teens.
- Power & Energy was $8.2 billion in Q2 2026 sales — about 40% of the total — the segment where data-center demand shows up.
What We’re Watching
- AI-specific data-center revenue is not disclosed. Power & Energy at about 40% of sales is the nearest proxy, so a shift in data-center demand would be slow to surface in reported numbers.
- Capacity additions carry depreciation. Management says adding capacity 'does have a drag on margins, particularly in Power and Energy over the next few years.'
- Tariff costs are guided to about $2.2 billion for FY2026, with no additional IEEPA recoveries assumed in the second half.
- Resource Industries margin swung from 10.0% (−700 bps y/y) in Q1 2026 to 14.9% (+40 bps y/y) in Q2 — the least predictable line in the P&L.
On the evidence in the file, the thesis is strengthening. Guidance was raised in both quarters in the window, backlog set a record, and the AI-linked power generation line accelerated. Management's guides moved only up or favorably down, with no cuts, across a two-quarter window. The bear case rests on what Caterpillar does not disclose — how much revenue comes from data centers, and whether out-year demand is contracted or customer color. The open question: when the new capacity is running in 2027–2029, is the data-center order book still there, or does it prove to have been a window rather than a level?
Earnings Beat
Caterpillar's Q2 2026 sales and revenues were $20.5 billion, up 24% year over year — the first quarter above $20 billion in company history. Gross margin was 37.8%. The standout metric was backlog: $72 billion, up $9 billion from the prior quarter and roughly 92% year over year, with all three primary segments contributing.
| Metric | Q2 FY2026 | Q1 FY2026 | Q2 FY2025 | YoY |
|---|---|---|---|---|
| Revenue | $20.5B | $17.4B | $16.6B | +24.0% |
| Gross margin | 37.8% | 35.1% | 33.0% | +480bps |
| EBITDA | $4.9B | $3.7B | $3.5B | +41.4% |
| EPS | $7.77 | $5.47 | $4.62 | +68.1% |
| Backlog | $72B | $63B | n/a | +~92% y/y |
| Power generation sales-to-users growth | +72% | +48% | n/a | vs. +48% in Q1 2026 |
This is the first time in company history that we generated over $20 billion of sales and revenues in a single quarter.— Joe Creed, CEO, 2026-08-04
Management tone: The tone was more confident and more quantitative between the two calls. Q1 2026 opened with record orders and raised guidance; Q2 2026 raised guidance again and added specific lead-time detail — gas prime into the back half of 2028 and into 2029, turbines a little farther out, diesel standby well into 2028. Management reframed the backlog: in Resource Industries and Construction Industries it described backlog as a production function, while Power & Energy is supply-limited. On tariffs the tone improved, with the full-year cost estimate falling from $2.6 billion to about $2.2 billion and a $392 million IEEPA recovery recognized in Q2 that management flagged as non-recurring.
Management Guidance
For FY2026, management guides sales and revenues growth to mid- to high teens, adjusted operating margin higher than its prior expectation but near the bottom of the target range once the $392 million of Q2 IEEPA tariff recoveries are excluded, tariff costs of about $2.2 billion with no further IEEPA recoveries assumed in the second half, MP&E free cash flow in the top half of the $6–$15 billion range, CapEx of about $3.5 billion, restructuring of about $300–$350 million, and an effective tax rate of about 23%. For Q3 2026 it guides another strong quarter of sales growth, higher year-over-year adjusted operating margin, about $600 million of tariffs, higher Power & Energy and Construction Industries margins, Resource Industries similar, and a slight increase in Construction Industries dealer inventory.
Trajectory
Enterprise revenue growth has accelerated: year-over-year growth ran from about −1% in mid-2025 to +9.5%, +18.0%, +22.2% in the following quarters, and +24% in Q2 2026. The driver is Power & Energy, where power generation sales to users grew 72% year over year in Q2 2026, up from 48% in Q1, and the large reciprocating engine backlog has grown more than 3.5x since January 2024. Backlog reached $72 billion, roughly 92% above the prior year, with 59% expected to be delivered within the next 12 months — a ratio management says has been stable for three quarters. The counterweight is margin: capacity additions bring depreciation, which management says weighs on Power & Energy margins for the next few years, and full-year margin sits near the bottom of the target range once the non-recurring IEEPA recoveries are excluded.
The Model
The model projects FY+1 revenue of $79.7 billion and EBITDA of $17.9 billion, a 22.5% margin. For FY+2 it projects revenue of $88.0 billion and EBITDA of $20.2 billion, a 23.0% margin. The near-term anchor is the $72 billion backlog, with 59% due to convert within 12 months, plus capacity now being installed — incremental large-reciprocating units as early as 2027. The FY+2 step-up leans on the full capacity ramp and management's stated long-term targets: power generation sales more than 3x the 2024 baseline by 2030, and enterprise revenue growth of 6–9% a year from 2024 to 2030.
| Metric | FY2025 | Next FY (E) | Following FY (E) |
|---|---|---|---|
| Revenue | $67.6B | $79.7B | $88.0B |
| YoY Growth | — | +17.9% | +10.4% |
| EBITDA | $13.5B | $17.9B | $20.2B |
| EBITDA Margin | 19.9% | 22.5% | 23.0% |
Projections are the median of 5 independent model runs. The model’s revenue sits 6.8% above analyst consensus.
For FY2026, management guides sales and revenues growth to mid- to high teens, adjusted operating margin higher than its prior expectation but near the bottom of the target range once the $392 million of Q2 IEEPA tariff recoveries are excluded, tariff costs of about $2.2 billion with no further IEEPA recoveries assumed in the second half, MP&E free cash flow in the top half of the $6–$15 billion range, CapEx of about $3.5 billion, restructuring of about $300–$350 million, and an effective tax rate of about 23%. For Q3 2026 it guides another strong quarter of sales growth, higher year-over-year adjusted operating margin, about $600 million of tariffs, higher Power & Energy and Construction Industries margins, Resource Industries similar, and a slight increase in Construction Industries dealer inventory.
What Could Go Right — and Wrong
- Power & Energy production ramps ahead of the 2027–2029 plan, pulling forward the roughly 15 GW of new large-reciprocating capacity.
- The 10-megawatt engine restart ramps faster than the roughly 18-month plan after first shipments in Q4 2026.
- AI-specific data-center revenue gets disclosed as a clean line, letting readers underwrite the exposure directly.
- Aftermarket and services from the prime-power installed base scales earlier than 2030.
- Tariff costs fall further than guided, or additional IEEPA recoveries land.
- A hyperscaler or data-center customer defers or cancels a large order, moving a backlog that comes in lumpy large awards.
- Power & Energy production misses the ramp because of supplier constraints — material and component shortages, semiconductor availability and logistics or labor inefficiencies, all flagged in the 10-K.
- Construction Industries channel overcorrects, with a dealer-inventory drawdown larger than the guided over $1 billion.
- Resource Industries margin re-collapses as it did in Q1 2026, when it fell 700 bps year over year.
- Competitor capacity additions — Cummins adding 20 GW, GE Vernova targeting 30 GW output, Baker Hughes doubling turbine capacity, Generac tripling — land into softer demand after 2027.
Looking Ahead
Over the next four quarters the story turns on execution rather than demand. Management guides Q3 2026 to another strong sales-growth quarter with about $600 million in tariffs and higher Power & Energy and Construction Industries margins; Q4 2026 brings the first shipments of the restarted 10-megawatt engines and a guided Construction Industries dealer-inventory drawdown of over $1 billion. The 2027–2029 window is when the heavy capacity investment lands, with incremental large-reciprocating units as early as 2027. Whether the demand behind the record backlog persists into that window is the question the coming quarters start to answer.
- Q3 2026Q3 2026 results — Tests guidance: strong sales, ~$600M tariffs, higher P&E and CI margins
- Q4 202610-MW engine shipments — First shipments of restarted platform; ~18-month ramp to ~1.5 GW
- Q4 2026CI dealer inventory drawdown — Guided reduction over $1 billion tests Construction Industries demand
- 2027First large-recip capacity units — Incremental units from the raised capacity plan arrive as early as 2027
- By 2030Power generation 3x target — Management targets power generation sales above 3x the 2024 baseline
- End of decadeRecip engine cash payback — Management expects positive cash payback on the full recip engine investment
Financials
Annual Summary
| Metric | FY2024 | FY2025 | TTM | YoY |
|---|---|---|---|---|
| Revenue | $64.8B | $67.6B | $74.7B | +4.3% |
| Gross Margin | 36.0% | 32.5% | 33.9% | 345bps |
| EBITDA | $15.2B | $13.5B | $15.5B | -11.5% |
| EBITDA Margin | 23.5% | 19.9% | 20.7% | 356bps |
| Net Income | $10.8B | $8.9B | $10.8B | -17.8% |
| Free Cash Flow | $8.8B | $7.5B | $9.0B | — |
| Net Cash | — | — | — | — |
Key Ratios (Trailing)
- P/E TTM—
- EV/EBITDA TTM—
- EV/Revenue TTM—
- Price/FCF TTM—
- Gross Margin (TTM)33.9%
- EBITDA Margin (TTM)20.7%
- Net Margin (TTM)14.5%
- ROIC17.9%
- FCF Conversion58.1%
- SBC / Revenue0.3%
The Company
Caterpillar describes itself as the world's leading manufacturer of construction and mining equipment, off-highway diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives, with $67.589 billion in sales and revenues for 2025. Its role in the AI buildout runs through Power & Energy, which makes reciprocating-engine generator sets, Solar Turbines industrial gas turbines and diesel standby gensets for prime and backup data-center power. As grid interconnection queues stretch for years, developers are turning to behind-the-meter generation, and Caterpillar sells the machines that produce it.
The company organizes around three primary segments — Power & Energy, Construction Industries and Resource Industries — plus a captive financing arm, Financial Products (Cat Financial). Its FY2025 10-K names manufacturing plants by segment across the United States, Australia, Brazil, China, the Czech Republic, France, Germany, India, Italy, Mexico and the UK, though it does not attach product lines to individual sites. Caterpillar also sells through a dealer network and, in 2026, launched a dealer-owned rental joint venture, Major Projects, aimed at multibillion-dollar projects including data-center builds.
Business Segments
Competitive Landscape
Caterpillar competes across all three segments. In Power & Energy the 10-K names Cummins, Deutz AG, Rolls-Royce Power Systems and Siemens Energy as principal competitors, with GE Vernova, Kawasaki Heavy Industries and Everllence among the others. A separate group of packagers — Aggreko, Generac, Rehlko (formerly Kohler Energy) and Baker Hughes — buys engines and other components and competes regionally, and several of these are simultaneously competitors and customers or suppliers. In Construction Industries and Resource Industries, Caterpillar names Komatsu, Deere, Hitachi, Volvo CE and Sany among its competitors.
- CumminsNamed a principal Power & Energy competitor in the 10-K. Neighbor read-through shows Cummins demand 'constrained by capacity,' large gensets sold out into H2 2028, a multiyear hyperscaler agreement and about 20 GW of added capacity.
- GE VernovaNamed a Power & Energy competitor. Neighbor data shows Q2 orders of $24.2B (+88%), 116 GW under contract and a target of 30 GW annual output by 2030.
- GeneracNamed among the packagers that source engines. Neighbor data shows a $1.6B data-center backlog, two hyperscale supply agreements and lead times of 40–45 weeks.
- Baker HughesNamed both as a competitor and a packager. Neighbor data shows record Q2 Power Systems orders of $2.6B, including $2.2B from data centers.
- KomatsuNamed in the 10-K as a Construction Industries and Resource Industries competitor; not discussed further in the source.
Supply Chain
Caterpillar sits between Tier 1 and Tier 2 component suppliers and a customer base of data-center developers, power providers, utilities, miners and contractors. One documented supplier names Caterpillar as a 10%-plus customer.
More on CAT: Earnings recap