We initiate coverage of Caterpillar with a Buy rating ahead of its Q4 2025 earnings report, driven by a combination of robust end-market demand and secular technology adoption. The Energy & Transportation segment, which contributed over 30% of total revenues in Q3, remains a key catalyst after sales to users surged 25% year-over-year and Power Generation equipment orders jumped 33%. Our conviction is bolstered by a 39% year-over-year increase in order backlog, which climbed by $2.4 billion in Q3 alone, providing strong revenue visibility into the coming quarters.

Caterpillar’s consolidated backlog now exceeds $35 billion, reflecting accelerated capital expenditure in infrastructure and energy transition projects globally. Within the Construction segment, order intake rose 22% in Q3 on sustained public and private infrastructure spending. Meanwhile, the Power Generation backlog of $8.5 billion represents a 33% year-over-year gain, driven by demand for both traditional diesel gen-sets and modular microgrid solutions. These dynamics underpin our expectation of a double-digit sequential revenue increase in Q4, with Energy & Transportation leading the way.

Management has signaled continued margin expansion through operational leverage and digital service monetization. In Q3, adjusted operating margin expanded by 180 basis points to 15.8%, aided by factory throughput improvements and pricing discipline. Looking ahead, the rollout of AI-enabled equipment diagnostics and predictive maintenance services is expected to drive incremental service revenue growth of 12–15% annually. We forecast full-year adjusted operating margin to improve by 200–250 basis points, supporting stronger free cash flow conversion and further shareholder returns.