Caterpillar Inc. (NYSE:CAT) sells construction and mining machinery, engines, and power-generation equipment through a dealer network supplying parts, repairs, and financing. Infrastructure projects and data-center construction are increasing equipment demand, creating opportunities for initial sales and subsequent maintenance.
First-half 2026 revenue rose 23% to approximately $38 billion, while dealer inventories increased $2.6 billion versus $200 million a year earlier. The company also appears in Insider Monkey’s 10 Best Industrial Stocks to Invest in Now. The investment question is whether customer purchases can sustain earnings growth when dealers stop adding so much inventory.
The Dealer Network Must Earn More Than It Costs
The advantage of Caterpillar Inc. is practical: available parts and technicians reduce downtime for customers whose idle equipment can delay an entire project. Expanded commitments offering next-day parts and two-day repairs can help turn an equipment sale into years of maintenance revenue. Reliable support encourages repeat purchases and helps defend equipment pricing.
Competition can narrow that advantage. Komatsu Ltd. (TSE:6301) opened an Edmonton parts center in September, doubling its Canadian warehouse capacity and supporting 24-hour delivery to dealers across much of Western Canada. Faster rival service could weaken differentiation, requiring continued spending on parts and technicians to protect customer retention, pricing and margins.
Maintaining the network also requires rental capacity. Second-quarter sales to users increased 25%, including 22% in Construction Industries and 72% in Power Generation. These statistics include equipment entering dealer rental fleets, expanding capacity before customers put every machine to work.
That is why a larger local network must keep its assets working. Rental revenue was growing in North America, but utilization must justify the additional equipment. Otherwise, inventory and financing costs absorb dealers’ cash and weaken replacement orders. The network supports a higher earnings multiple when service profits and customer retention outweigh its costs.
The Lower P/E Requires More Durable Earnings
Caterpillar Inc. carries approximately 25x forward P/E and 35x trailing P/E. The trailing multiple uses historical earnings; the forward multiple uses forecasts. The valuation remains demanding because substantial improvement is expected while dealer restocking and tariff recoveries support current profits.
Analysts expect adjusted EPS at Caterpillar Inc. to reach $27.20 in 2026, up approximately 43%, followed by $32.42 in 2027, another 19% increase. Higher equipment volumes and favorable pricing are already lifting operating profit. Data-center power demand provides additional growth as more engines and turbines move through factories.
Accounting treatment also matters. Second-quarter adjusted EPS excluded $202 million of restructuring costs, including losses from divesting certain overseas entities. Excluding these charges raises adjusted earnings relative to reported earnings without adding equipment demand.
Reported operating margin increased to 20.9% from 17.3%, including $392 million of expected tariff recoveries. Removing that benefit leaves approximately 19.0%, showing improvement beyond the recoveries. These gains remained in adjusted EPS. They increase historical earnings and lower the trailing P/E; they do not explain the lower forward P/E.
Investors therefore need to consider how temporary refunds can overstate the margin available next year. Sustaining forecast earnings requires profitable deliveries and cost control after those benefits disappear.
A Similar Multiple Now Requires Stronger Profits
The 25x forward P/E for Caterpillar Inc. compares with approximately 26x at year-end 2025. The small difference accompanies a stronger near-term earnings outlook, following a weaker year. Adjusted EPS declined from $21.90 in 2024 to $19.06 in 2025, while reported operating margin fell from 20.2% to 16.5%.
Rebuilding those profits improves earning power. The investment case becomes stronger when growth continues beyond recovering lost margins. Infrastructure and power projects can extend equipment demand, provided deliveries remain profitable as capacity expands.
For Caterpillar Inc., the next test is the inventory reversal. Management expects Construction Industries dealer inventories to decline by more than $1 billion in the fourth quarter. Dealers can satisfy customers by selling machines already on hand, reducing factory shipments even when retail activity remains healthy.
If customer demand also slows, lower production would spread factory costs across fewer machines. That would weaken the earnings supporting the forward multiple. Relative to the year-end 2025 benchmark, investors are paying a similar multiple for profits that must survive a changing inventory cycle.
The Peer Comparison Turns on Different Recoveries
Deere & Company is the closest U.S.-listed operating peer for the dealer-restocking thesis. Both businesses combine equipment manufacturing, dealer distribution, and customer financing. The peer’s heavier agricultural exposure ties demand to farm economics, while construction, mining, and power investment expose its rival to different spending cycles. Deere also ranks on our farmland and agriculture stocks list. See which company ranks #1.
Caterpillar Inc. has a forward P/E of approximately 25x, compared with 30x for Deere & Company. Assessing those multiples requires examining the earnings recovery behind each business.
Analysts expect the agricultural peer’s adjusted EPS to decline approximately 2% in fiscal 2026 before rising 26% in fiscal 2027, versus 19% for the construction and power specialist. Its fiscal 2026 ends November 1, versus December 31 for its rival. The stronger expected rebound offers support for the higher multiple, but it relies on improving equipment demand.
Current profitability favors the construction and power specialist. Its second-quarter Construction Industries margin was 23.3%, versus 12.1% for the peer’s Construction & Forestry business in its quarter ended August 2. Product mix and quarter-ends differ, but stronger construction margins provide a cushion if volumes soften.
Cash generation adds support for Caterpillar Inc.. Company-defined non-GAAP Machinery, Power & Energy free cash flow reached $5.1 billion in the second quarter, versus $2.4 billion a year earlier. This measures operating cash flow after capital spending for those operations, excluding discretionary pension contributions.
Management expects annual free cash flow in the upper half of its $6 billion to $15 billion target range while funding approximately $3.5 billion of capital expenditure. The peer’s equipment operations generated approximately $3.3 billion after capital spending over its first nine months, including dividends from its financing arm.
Both businesses can fund investment internally. Their financing operations also expose earnings to credit losses and borrowing costs. Supporting 25x requires cash generation to remain strong after funding capacity investment and absorbing slower dealer orders.
Conclusion
Caterpillar Inc. remains demanding at 25x forward earnings. Dealer support, power demand, and cash generation strengthen earnings power, but sustaining the valuation requires growth beyond restocking and tariff recoveries.
Customer sales must remain healthy as dealer inventories stabilize, rental utilization must justify fleet purchases, and service profits must cover continued competitive investment. Production cuts, weaker cash conversion or disappointing returns on new capacity would undermine the valuation.
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This article is originally published at Insider Monkey.
