Backlog $63B (+79% YoY), Capacity Raised to 3x 2024 Levels, 2030 LT CAGR Raised to 6–9% — Maintaining Outperform

Rating Action

This print maintains the Outperform rating we moved to at Q3 2025. The thesis-validating elements: (a) backlog +79% YoY at $63B with sequential growth in all three segments and Q1 total orders an all-time record; (b) sixth prime-power ≥1GW data-center deal booked (Pro Power 2.1GW) within a six-month window; (c) large recip capacity raised to 3x 2024 levels — a 50% upsize from the November Investor Day announcement of 2x; (d) 2030 enterprise LT CAGR raised to 6–9% (vs. 5–7% prior); (e) Power Gen 2030 target raised to >3x (vs. >2x prior); (f) FY 2026 outlook raised to low double-digit growth; (g) FY 2026 tariff drag revised down on Supreme Court IEEPA ruling; (h) ME&T FCF now higher YoY despite the CapEx step-up; (i) $4.5B Q1 ASR signals exceptional management confidence in through-cycle FCF compounding.

• Q2 2025 (Initiating at Hold): Real Power Gen pull, but multiple already reflected the data-center narrative; tariff trajectory and CI cyclical reset offset.
• Q3 2025 (Upgrading to Outperform): Prime-power data-center pipeline opened with Joule + Hunt named anchors; Solar Turbines lead times extending; STUs acceleration broad; FY 2025 raised; operating leverage realizing despite peak Q4 tariff drag.
• Q4 2025 (Maintaining Outperform): Four prime-power ≥1GW orders booked (incl. AIP Monarch 2GW); record $51B backlog; FY 2026 revenue at top of LT CAGR target; record FY 2025 sales + FCF; segment reorganization made P&E the new structural growth core.
• Q1 2026 (Maintaining Outperform): Sixth prime-power ≥1GW deal (Pro Power 2.1GW); capacity raised to 3x 2024 (vs. 2x); 2030 LT CAGR raised to 6–9%; Power Gen target >3x; FY 2026 outlook raised to low double-digit growth; FCF outlook raised; tariff drag revised down. The thesis is now compounding at the upper end of our underwriting band.

Results vs. Consensus

One of the cleanest beats in CAT's recent history. The composition is what matters: revenue beat ~$0.9B with broad-based volume; EPS beat ~$0.92 with the operating leverage flowing through despite the elevated tariff drag. The $0.31 favorable tariff adjustment ($600M actual vs. $800M January estimate) accounts for ~1/3 of the EPS beat — the remaining ~$0.61 beat is structural operating leverage on top of price + volume.

Segment Performance

Note: as of March 2026, the Rail division has been moved from Power & Energy to Resource Industries via 8-K recasting. The Q1 2026 segment numbers reflect the new structure.

Power & Energy (P&E) — +22% YoY ex-Rail; Power Gen STUs +48%

• Sales: $7.0B, +22% YoY (post-recasting).
• Segment operating profit: $1.5B, +13% YoY; segment margin 20.6% (-170bps YoY).
• Tariff impact: ~270bps drag on margin; P&E bears ~25% of Q2 2026 tariff cost.
• Sales-to-users +32% YoY (vs. +37% Q4) with growth across all applications. Power Generation STUs +48% (vs. +44% Q4 — accelerating); driven by data-center demand and increasing mix toward prime power. Oil & gas STUs +16% (gas compression). Industrial growth across multiple applications.
• Margin: Stronger than expected on litigation efforts to reduce tariff costs + favorable volume. Higher manufacturing costs reflect capacity-build depreciation.
• Backlog visibility: Large recip backlog +3.5x since Jan 2024 capacity announcement; orders extending into 2028; Pro Power 2.1GW deliveries spread over five years.
• Q2 2026 setup: Strong sales growth YoY (Power Gen + O&G); favorable price; including-tariff margin slightly higher YoY.

Construction Industries (CI) — The Beat-of-the-Quarter Segment

• Sales: $7.2B, +30% YoY (per call — transcript notes 38% sales increase, but revenue is $7.2B vs. ~$5.2B Q1 2025; the 30% figure aligns to ~$5.5B Q1 2025).
• Segment operating profit: $1.5B, +50% YoY; segment margin 21.4% (+160bps YoY despite ~550bps tariff drag).
• Tariff impact: ~550bps drag on margin; CI bears ~50% of Q2 2026 tariff cost.
• Sales-to-users +7% YoY (5th consecutive quarter of growth). NA STUs slightly above expectations on non-resi construction; rental fleet loading + dealer rental revenue both grew. EAME slightly down (timing of key projects); APAC about flat (timing); LatAm slightly above expected.
• Dealer inventory build $1.5B (more typical seasonal pattern vs. ~flat Q1 2025) — the Q1 sales-volume tailwind. Note: CAT changed disclosure to report dealer inventory in total + CI only (removing the total machines analysis), reflecting the principle that >70% of P&E and RI dealer inventory is firm-customer-order-backed.
• Margin: Stronger than expected on lower manufacturing costs (cost absorption) + stronger volume.
• CAT Compact: New streamlined customer experience for compact equipment launched at CONEXPO — an addition to the merchandising / channel program toolkit.
• Q2 2026 setup: Strong sales growth on STUs + favorable price; minimal change in CI dealer inventory; including-tariff margin higher YoY.

Resource Industries (RI) — Order Intake Highest Since 2012; Q1 STUs Below Expectations

• Sales: $3.8B, +4% YoY (post rail recasting).
• Segment operating profit: $378M, -39% YoY; segment margin 10.0% (-700bps YoY).
• Tariff impact: ~500bps drag on margin; RI bears ~25% of Q2 2026 tariff cost.
• Sales-to-users +6% YoY (below expectations on customer-delivery timing). Mining STUs higher YoY across most product lines; heavy construction + Q&A about flat; rail at low levels.
• Order intake: Highest quarterly order intake since 2012. Driven by copper + gold mining demand + NA heavy construction carry-on from CI strength.
• Margin: Lower than expected on lower volume + timing of discounts impacting price. Note: includes autonomy investment headwind — outsized given RI's smaller revenue base.
• RPMGlobal acquisition: Closed February 2026. Brings mining software technology into the portfolio — integrated solutions for safety + productivity. Long-term tech-enabled RI growth lever.
• Q2 2026 setup: Strong sales growth YoY on STUs + favorable price (geographic mix); margin lower YoY on continued autonomy + tech investment headwind. Margin improvement expected through year as price realization improves.

Financial Products (Cat Financial) — Best Q1 New Business Volume in 15+ Years

• Revenues: $1.1B, +9% YoY.
• Segment profit: $245M, +14% YoY on higher earning assets + insurance services margins.
• Credit quality: Past-dues 1.39% (-19bps YoY). Allowance rate 0.86% (matching Q4 2025 lowest-ever).
• Activity: Retail credit applications ~flat YoY; retail new business volume +8% YoY — highest first quarter in over 15 years.
• Read-through: Customer credit health remains exceptional; merchandising programs continue to attract retail demand at record-low loss rates.

Key Topics & Management Commentary

Capacity Step-Up to 3x: The Strategic Reframe of the Call

The single most thesis-altering disclosure of the call. Per Creed, since the original capacity expansion announcement in January 2024, CAT's large reciprocating engine backlog has grown by more than 3.5x. Customers committing to longer-term orders — some well into 2028. The capacity decision is sized against demand signal CAT has high conviction in:

“I've been around a long time. I know there are no such thing as sure things. But when you think about all the capacity investments we've made in my career, this is a better line of sight to getting the return than anyone we've ever made. And we don't need to be at all this capacity to be OPACC positive and grow OPACC. So that gives us confidence to make this investment at this point in time.”
— Joe Creed, CEO

Mechanics of the additional capacity (per call):

• Investment primarily 2027–2029.
• Heavy 2027 investment, continuing into 2028–2029.
• Incremental units from the latest capacity expected as early as 2027.
• ME&T CapEx average 4–5% of ME&T sales through 2030 (vs. historical ~3%).
• Positive cash payback by end of decade on entire reciprocating engine investment.
• Translates to ~15GW additional annual capacity when fully installed (mix is different from the prior 50GW framework, so the figures don't add directly — but the additional ~15GW is incremental).

2030 Algorithm Refresh: 6–9% LT CAGR; Power Gen >3x

Raso (Evercore ISI) made the key analytical point: the 2030 LT CAGR step-up from 5–7% to 6–9% can be accounted for almost entirely by the Power Gen 2030 sales target uplift from >2x to >3x. Creed confirmed: the math comes from the Power Gen sales target uplift; CI, RI, and oil-and-gas-within-P&E targets are unchanged but all three segments still have growth ambitions in the 6–9% framework. The implication: the framework refresh is principally a Power Gen capacity acknowledgment, not a broader algorithm rerating.

Six Prime-Power ≥1GW Deals: Pro Power 2.1GW Latest

Pro Power deal disclosed in prepared remarks: up to 2.1GW of large gas generator sets for prime power supporting data center, oil and gas, and industrial applications. Rolling backlog entry; deliveries over five years; long-term services growth opportunity. This is the sixth ≥1GW prime-power agreement plus multiple smaller orders. Creed acknowledged he doesn't have the explicit total prime-power gigawatt count "on the top of his head" — signaling the prime-power book is now too large to track informally and will be a formal disclosure at the next Investor Day refresh.

Architecture trend: per Creed, the trend is more data-center sites asking for behind-the-meter power; CAT's advantage is the full stack (recip + turbine + microgrid + Vertiv-partnered cooling) up to 38MW. Customers are mixing recip and turbines depending on site characteristics, gas access, footprint, and timing. "Each one is a little bit different, but it does present an opportunity for us."

Tariff Drag: $200M Q1 Favorable, Full Year Cut to $2.2–2.4B

Q1 actual tariff cost $600M vs. $800M January estimate — $200M favorable on an adjustment to 2025 tariff cost computation reflected in operating profit within corporate items (segment margins not impacted; only impacts Q1). FY 2026 tariff cost revised down to $2.2–2.4B (vs. $2.6B January framework). Per the new CFO Kyle Epley's outlook commentary, the underlying Q2–Q4 expectation has not changed significantly — the change reflects the recent Supreme Court IEEPA ruling (CAT removed IEEPA tariffs and added Section 122 tariffs; net is lower; CAT not pursuing IEEPA-related refunds). Q2 2026 tariff cost ~$700M (vs. ~$400M Q2 2025).

FY 2026 Outlook Raised to Low Double-Digit Growth + ME&T FCF Higher YoY

The FY 2026 algorithm step-up vs. January framework:

• Sales & Revenues: Low double-digit growth (vs. top of 5–7% LT CAGR).
• Adjusted operating margin (ex-tariffs): top half of target range.
• Adjusted operating margin (incl. tariffs): near bottom but higher than January framework.
• FY 2026 tariff cost: $2.2–2.4B (vs. $2.6B prior).
• ME&T FCF: higher than 2025's $9.5B (vs. prior outlook of slightly lower).
• FY 2026 CapEx: ~$3.5B (unchanged) — Q1 was ~$700M.
• Tax rate: ~23% (unchanged).

$4.5B Q1 ASR — The Capital-Allocation Confidence Signal

$5.7B total Q1 capital return: $4.5B accelerated share repurchase (50% larger than $3B Q1 2025 ASR; may run up to nine months) + ~$0.5B open-market buybacks + $0.7B dividend. The ASR is sized at ~10x Q1 ME&T FCF generation and ~50% of FY 2026 ME&T FCF. Read: management's view of intrinsic value is materially above the post-print stock price, and the firm has the FCF runway to deploy capital aggressively even with the CapEx step-up. The signal is consistent with the upsized 2030 framework — if 2030 sales are tracking to 6–9% CAGR and Power Gen is >3x, the ASR mechanics make sense.

Bonfield Retirement; Epley Steps In

After 90+ quarterly/biannual earnings calls, Bonfield's Q1 2026 was his last as CFO — Epley succeeds effective May 1, 2026. Bonfield's tenure framed by Creed as "like no other CFO we've ever had" — a meaningful endorsement. Epley joins from Senior VP, Global Finance Services Division, with 20+ years at CAT and deep involvement in the Investor Day strategy refresh. We treat the transition as low-risk continuity in financial framework + capital allocation philosophy. The fact that Bonfield could exit on a print this strong is itself a useful capstone signal.

FY 2026 Guidance & Outlook

Q2 2026 specifics: Strong sales growth YoY across all three primary segments. Higher STUs growth rate vs. Q1; minimal change in CI dealer inventory. Tariff cost ~$700M (CI ~50%, P&E ~25%, RI ~25%). Including-tariff margin: P&E slightly higher YoY; CI higher YoY; RI lower YoY (autonomy + tech investment).

Analyst Q&A — Notable Exchanges

Q&A was concentrated heavily on the capacity expansion, the 2030 algorithm refresh, prime-power architecture, and CFO transition. Notable threads:

• Robert Wertheimer (Melius) opened on which end-markets predominated in the additional 3x capacity decision. Creed: principally Power Gen, but the capacity is fungible across oil & gas, mining, and other applications. Heavy investment in 2027, continuing in 2028–2029; some incremental units possibly out as early as 2027.
• Jerry Revich (Wells Fargo) on the architecture of the prime-power deals (recips vs. turbines mix). Creed: each site is different; CAT's full-stack advantage gives configuration flexibility. Six ≥1GW deals + multiple smaller-than-1GW.
• David Raso (Evercore ISI) on the 6–9% LT CAGR composition. Creed confirmed: the math comes almost entirely from Power Gen >3x; CI/RI/oil-and-gas targets unchanged but all three segments contribute growth. Bonfield's CFO retirement got the most heartfelt acknowledgment of the call from Raso.
• Tami Zakaria (JPMorgan) probed why margin opportunity is unchanged given the upsized top line. Bonfield: progressive 31% margin pull-through is consistent with the prior framework; tariff drag + capacity-build depreciation means same margin level even with higher sales. The aim is to mid-cycle margin range over time.
• Angel Castillo Malpica (Morgan Stanley) on capacity decision (large engines vs. gas turbines). Creed: large recip backup-power demand growing alongside prime-power demand; CAT continues to invest in turbine capacity from prior announcement; backup power will continue to grow not be displaced.
• Michael Feniger (Bank of America) on the 50GW-by-2030 framework update and Power Gen pricing. Creed: the 3x capacity expansion adds ~15GW additional annual capacity; mix is different so 50GW + 15GW != 65GW directly. Pricing 2% segment-wide reflects geographic + product mix; constrained P&E areas pricing higher; competitive areas (industrial, smaller PG, marine) flatter.
• Jamie Cook (Truist) on whether margin variability narrows as services + visibility grows. Creed: no intention to narrow margin range; CAT focuses on absolute OPACC growth not margin percent. Backlog growth in all three segments validates broad health.
• Chad Dillard (Bernstein) on Tier-1/Tier-2 supplier readiness for capacity ramp + 2030 prime/backup mix. Creed: supply base partnership + forecast visibility critical; running ahead of plan partly on supplier performance; no major supplier issues.
• Kyle Menges (Citi) on RI backlog drivers (new vs. existing mines; commodity exposure). Creed: principally fleet replacement at aging customer fleets + copper + gold demand. NA heavy construction strength carrying through to RI.
• Mig Dobre (Baird) closed on RI long-term margin recovery to 2012-era levels. Creed: 2012 not directly comparable post-rail-recasting; autonomy investment outsized impact on RI margins given smaller revenue base; expects margin improvement through 2026 with continued segment growth lifting operating leverage.

What They’re NOT Saying

• No specific prime-power gigawatt total disclosed. Creed acknowledged he doesn't track the total prime-power gigawatt count informally; will likely be a formal disclosure at the next Investor Day. We estimate the six ≥1GW orders aggregate to ~10–12GW based on disclosed sizes (Joule unspecified, Hunt unspecified, AIP Monarch 2GW, Pro Power 2.1GW, plus two smaller incl. likely 1GW each) plus "a handful" of smaller orders — likely another ~3–5GW. Total prime-power book in the $63B backlog likely $8–15B but unconfirmed.
• No explicit FY 2027 framework yet. Bonfield/Epley deferred to next quarter for any post-2026 detail. Reasonable expectation: the November Investor Day refresh in late 2026 will articulate a FY 2027 framework, supported by the capacity ramp visibility from the 2027 phase of the additional 3x investment.
• No commentary on the AI capex pause risk. Multiple analysts probed adjacent (architecture, customer mix, supply chain), but none explicitly asked the AI-infra demand-pause question. Creed's "not the only company doing AI — we ourselves use a lot more data; cloud growth still significant" framing is the implicit answer: data-center power demand is broader than AI-only and the floor under it is the cloud + data growth.
• No quantification of RPMGlobal acquisition financial contribution. Closed February 2026; RI segment includes it but not sized. The acquisition framework is "long-term tech-enabled growth" rather than near-term margin contribution.
• No specific autonomous truck installed-base update. Q4 disclosed 827 trucks at year-end 2025 (vs. 690 a year prior). Q1 2026 update not provided in prepared remarks — the autonomy lever continues to develop but unit count tracking to the 2030 3x-vs-2024 target.
• No new dividend commentary. 32 consecutive years of dividend growth was cited in Q4 prepared remarks; Q1 commentary absent. Next dividend declaration the natural next data point.
• No comment on Solar Turbines additional capacity. The 3x recip capacity announcement is the headline; turbine capacity remains at the previously announced "more than 2x" by 2030 plan. We watch for a turbine capacity step-up at the next Investor Day refresh given the ramp in ≥1GW prime-power orders.

Market Reaction

The print landed before the open on April 30, 2026. The market reaction was strongly positive: the stock surged approximately 9–10% intraday, contributing meaningfully to a same-day Dow gain. The reaction was consistent with a clean double beat plus a structural framework upsize — the rare combination of a large near-term EPS surprise plus a multi-year algorithm acceleration. Volume was elevated; multiple sell-side desks raised price targets in the days following. The market correctly read the print as thesis-validating rather than narrative-driven — the order-book detail and capacity-step-up provide the underwriting support for a multi-year compounder framework.

Street Perspective

The bull case being made on the Street post-print converges on six planks: (1) the $63B backlog (+79% YoY) plus six ≥1GW prime-power deals book in a six-month window confirms the demand step-up is structural, not narrative; (2) the capacity step-up to 3x 2024 levels (vs. 2x announced just five months earlier at Investor Day) signals management's confidence in the demand-payoff math; (3) the 2030 LT CAGR raise to 6–9% (from 5–7%) is a meaningful framework rerating with backing in the order book; (4) FY 2026 outlook raised on tariff-drag relief + operating-leverage realization; (5) ME&T FCF now higher YoY despite the +$1B CapEx step-up implies the 2030 framework is underwriteable from an FCF standpoint; (6) the $4.5B Q1 ASR is the structural confidence signal — management's view of intrinsic value materially above current price.

The bear case being articulated centers on: (1) prime-power demand is concentrated among hyperscaler / AI-infra entrants — an AI capex pause is the principal tail risk; (2) the 4–5% ME&T CapEx-to-sales ratio through 2030 (vs. historical ~3%) implies depressed near-term margin from depreciation drag, partially offsetting the operating leverage; (3) the multi-year capacity build-out introduces execution risk — supplier readiness, time-and-materials cost inflation, and potential demand-cycle mismatch if the data-center build-out slows materially; (4) the multiple has expanded with the framework refresh — further upside requires either the 2027 capacity coming earlier than planned or a tariff resolution; (5) RI margin -700bps YoY in Q1 reveals the magnitude of the autonomy + tech-investment headwind on a smaller revenue base — segment-level margin recovery is a multi-year process.

Our read sides with the bull framing on (1)–(6) and treats the bear case (1) as the principal long-cycle tail risk we monitor (multi-customer diversification within the prime-power book mitigates single-customer concentration) and (2)–(5) as scoped/priced into the FY 2026 EPS framework. We hold conviction at maintain rather than upsize given the multiple's run with the structural rerating; we would reassess sizing if hyperscaler capex prints show material moderation, or if the 2027 capacity ramp slips materially.

Model Implications

• FY 2026 revenue: Low double-digit growth on $67.6B base = ~$74–76B. Power & Energy capacity-bound with upside if 2H ramp accelerates; CI dealer inventory tailwind realizing through 2H; RI strengthens with order intake conversion.
• FY 2026 adjusted operating margin: Near bottom of target range incl. $2.2–2.4B tariff drag; top half ex-tariffs.
• FY 2026 EPS: We raise our FY 2026 EPS framework to $22.00–24.00 (vs. prior $20.50–22.50) reflecting the FY revenue raise + tariff drag relief + ASR share-count benefit + tax-rate normalization.
• FY 2026 ME&T FCF: Higher than $9.5B (we model ~$10.0–10.5B) on the FY revenue raise; supportive of ~$8–9B FY capital return.
• 2030 framework: 6–9% LT CAGR ⇒ 2030 sales = $97–112B (vs. prior framework $84–92B). Power Gen >3x 2024 = $30B+ Power Gen sales by 2030 (vs. prior >2x = $20B+). Services $30B by 2030 unchanged.
• 2027 EPS: Preliminary framework $26–30 contingent on capacity ramp on plan + further tariff stabilization.
• Capital allocation: Q1 ASR $4.5B (running up to nine months); FY 2026 capital return likely ~$8–9B. Continued dividend growth supporting the 33-year aristocrat status.
• Backlog conversion: Of $63B, ~62% in next-12-months ($39B), ~38% beyond ($24B). The post-12-month backlog principally Power Gen + Solar Turbines + Pro Power 2.1GW (5-year delivery profile).

Thesis Scorecard

Overall: Thesis materially extends. Eight of eight bull pillars (incl. the new 2030 framework refresh) confirmed. Bear case scoped — tariff drag is receding; multiple risk and AI-capex tail risk are appropriately priced; capacity execution risk is the principal monitor.

Action: Maintaining Outperform on Caterpillar (CAT). We raise our FY 2026 EPS framework to $22.00–24.00 and our 2027 EPS framework to $26–30 on the capacity ramp + framework refresh. We hold conviction at maintain rather than upsize given the multiple's run with the structural rerating. We would reassess sizing if hyperscaler capex prints show material moderation, or if the 2027 capacity ramp slips materially.

Net: A thesis-validating, framework-upsizing print. Six prime-power ≥1GW deals booked in six months; capacity raised to 3x 2024 levels; 2030 LT CAGR raised to 6–9%; Power Gen 2030 target raised to >3x. Maintaining Outperform with a bigger denominator under the algorithm.