What happened in the quarter
Caterpillar posted adjusted EPS of $7.20 in Q3, edging past the $7.10 analyst average. Revenue was $20.68 billion, narrowly topping the $20.65 billion consensus.
The company told investors it expects only modest year over year revenue growth in Q4, and slightly lower sales volumes for its marquee construction machines. Even so, revenue increased and the order book climbed to an all time high of $78 billion.
On the earnings call, CEO Joe Creed said tech demand remains solid despite market chop. "Our AI orders continue to go up. We've had three really strong quarters in a row of orders," he said. "So we're pretty confident and bullish in where we sit right now."
Why the stock moved and where the worry comes from
The stock's slide added to a broader cool down in names tied to the AI buildout as investors question massive data center budgets and the bite from higher interest rates. Alphabet fell nearly 14% at one point, a record intraday drop, after weaker search and advertising sales stoked worries that AI could threaten its core business. The pullback has spread to suppliers too, with Caterpillar now off by nearly 40% from a June peak.
"The quality of the EPS beat gives investors a chink in the CAT armor, something that has proven difficult to fight this earnings season," wrote Oppenheimer's Kristen Owen. Michael O'Rourke of JonesTrading, where he serves as chief market strategist, added: "Revenues barely beating is really disappointing." Even with the slide, results beat almost all of the major financial line items this quarter.
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The power business is now the center of gravity
Caterpillar's power and energy segment, which makes generators, large engines and gas turbines, has become its biggest business by sales, overtaking the signature excavators and bulldozers. The company is in a multiyear buildout to expand that fleet, aiming to sharply increase capacity for big engines and gas turbines to serve data center demand.
That expansion has ridden a surge of orders as tech companies race to add computing capacity, fueling blockbuster results in earlier quarters. The latest report also showed revenue rising and the backlog hitting a record.
Politics, project timing and your portfolio
Local resistance to new data centers is building in the run-up to next week's US midterm elections, with critics citing heavy power and water use and potential effects on utility bills. Some states, including New York, have adopted limits on new projects, clouding where facilities can be sited and the speed at which they can be brought online. "It's become a voter and campaign issue," said Dec Mullarkey of SLC Management. "Investors are starting to moderate the earnings outlook for a lot of the companies that are at the heart of the buildout."
The bottom line: Caterpillar still has a towering backlog and says AI related orders have risen for three straight strong quarters, but it also guided to milder Q4 growth and slightly lower construction volumes. If data center spending cools or borrowing costs stay elevated, expectations for AI infrastructure suppliers may need to reset.
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