Caterpillar's Operating Margins Slipped in 2025: Bounce Back Ahead?

Caterpillar Inc. CAT witnessed a 350-basis-point year-over-year contraction in its adjusted operating margin to 17.2% in 2025. The margin trend weakened steadily through the year, starting at 18.3% in the first quarter, followed by 17.6% in the second and 17.5% in the third quarter, before dropping sharply to 15.6% in the fourth quarter. This sequential decline underscores mounting cost pressures, mainly due to tariffs.

A key factor behind the margin compression was a significant increase in costs. Cost of sales rose 11% year over year to $44.7 billion in 2025. While costs were down 7% in the first quarter, they climbed in each subsequent quarter, with the sharpest surge (29%) occurring in the fourth quarter. The quarter accounted for around 30% of the company’s annual costs. This was primarily driven by elevated manufacturing costs, including the impact of higher tariffs. The total impact of tariffs for the year was around $1.8 billion.

Tariff-related pressures are expected to persist in 2026. Caterpillar expects incremental tariff costs of around $800 million in the first quarter of 2026, a level similar to the fourth quarter of 2025. The run rate is, however, expected to improve toward the second half of the year as it takes actions to reduce its tariff exposure. Full-year tariff impact is estimated at $2.6 billion in 2026, which is $800 million higher than in 2025. The company noted that if the mitigating actions it has been planning to take in 2026 are not implemented, the impact from tariffs could be around 20% higher.

In the near term, profitability is likely to remain under pressure. For the first quarter, the adjusted operating margin is expected to be lower than the prior-year level of 18.3%. Operating margin for 2026 is expected to be near the bottom of the annual target range.

At approximately $60 billion in revenues, Caterpillar’s adjusted operating margins are projected to range between 15% and 19%. If revenues increase to $72 billion, margins could improve to 18–22%, while a stronger revenue scenario of $100 billion could support margins in the 21–25% range.

Among peers, Terex Corporation TEX also faced margin pressure, reporting a 100-basis point decline in operating margin to 10.4% in 2025. This was primarily due to lower volumes across both segments and unfavorable manufacturing variances stemming from proactive production cuts and tariff impacts. This was partially offset by cost-efficiency initiatives and contributions from its ESG acquisition.

Komatsu Ltd. KMTUY reported a 140-basis point contraction in operating margin to 14.4% in the first nine months of fiscal 2025. The company estimates an annual cost impact of 90 billion yen ($0.58 billion) from tariffs, with a net profit-and-loss impact of 55 billion yen ($0.35 billion) after mitigation measures. To offset these pressures, Komatsu plans to implement price increases and leverage strong mining demand to support earnings.

CAT’s Price Performance, Valuation & Estimates

CAT shares have gained 109.1% in a year compared with the industry’s 100.2% growth. The Zacks Industrial Products sector has gained 21.2% and the S&P 500 has moved up 16.1% in the same time frame. Meanwhile, Terex and Komatsu have gained 49.8% and 29.2%, respectively.

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CAT is currently trading at a forward 12-month P/E of 30.04X, a premium compared with the industry’s 28.88X. Terex is trading lower at 12.05X and Komatsu at 14.61X.

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The Zacks Consensus Estimate for Caterpillar’s 2026 earnings points to year-over-year growth of 19.2%, while the 2027 estimate implies growth of 21.7%.

Earnings estimates for CAT have moved up for both 2026 and 2027 over the past 60 days, as shown in the chart below.

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Caterpillar stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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