Bernstein: Caterpillar order growth slows; strong power generation demand fails to prevent earnings forecast cuts

Why did the third quarter fail to satisfy the market?

Caterpillar’s third-quarter 2026 earnings per share were $7.10, 1% above market expectations; segment operating profit excluding the impact of IEEPA tariffs was 1% below expectations.
The book-to-bill ratio fell to 1.3 from 1.5 in the previous quarter. Bernstein believes core profit slightly below expectations, together with the narrowing lead of orders over shipments, explains the share price weakness that day.

Third-quarter end-user sales of power generation equipment rose 75% year over year, driven by gas turbines and reciprocating engines purchased for data centers. Backlog with delivery times exceeding 12 months, driven mainly by power generation equipment, rose 12% quarter over quarter.
Continuing growth in demand for primary power has pushed gas reciprocating engine orders out to 2029 and gas turbine orders to 2030. Diesel generator set customers are predominantly hyperscale cloud providers; a larger proportion of primary power customers are developers and emerging cloud service providers.
Management also noted that primary power orders are growing in size, which could make quarterly orders and changes in backlog more uneven.

Mining equipment revenue rose approximately 15% year over year in the third quarter, and orders have grown strongly for three consecutive quarters; copper and gold prices and Canadian oil sands projects support demand. Commissioning delays and supply chain issues weighed on growth in the quarter, and the company expects to recover the lost ground in the fourth quarter.
Construction sales rose 18% year over year in the third quarter, but part of that came from a $300 million quarter-over-quarter increase in dealer inventories, which Bernstein expects could reverse in the fourth quarter. Meanwhile, North American demand for equipment loading was strong, Europe, Africa and the Middle East performed better than expected, and prices rose 5% year over year.

Bernstein cut its fourth-quarter 2026 earnings-per-share forecast from $8.28 to $6.37, 8% below market consensus; it also lowered its forecast for Machinery, Energy & Transportation revenue for the quarter by 16% and its adjusted operating profit forecast by 24%.
The firm cut its 2027 earnings-per-share forecast from $35.65 to $31.60, 4% below market consensus. It lowered its price target from $749 to $664, based on a price-to-earnings multiple of 21 times forecast 2027 earnings per share, and maintained its Market Perform rating.