Why Caterpillar Stock Surged 21% in October

Heavy equipment manufacturer Caterpillar (NYSE: CAT) reported solid third-quarter results on Oct. 29, beating analyst estimates across the board and triggering a rally for the stock.

Image source: Getty Images.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now, when you join Stock Advisor. See the stocks »

Revenue rose 10% year over year to $17.6 billion, with the increase driven by higher equipment sales to end users. Adjusted earnings per share came in at $4.95, down from $5.17 in the prior-year period but still well ahead of analysts' expectations. EPS was negatively impacted during the third quarter by a higher effective tax rate and a discrete tax charge.

By the time October came to a close, shares of Caterpillar had gained 21%, according to data provided by S&P Global Market Intelligence.

A record backlog, but tariffs hurt the bottom line

Caterpillar's $17.6 billion in third-quarter revenue represented an all-time quarterly record for the company. Caterpillar's backlog surged to $39.8 billion, another all-time best.

Sales rose across Caterpillar's three core segments. Construction Industries sales increased by 7%, Resource Industries sales were up 2%, and Energy & Transportation sales surged by 17%. However, the impact of tariffs hurt segment profit margins in each segment. The only segment to report an increase in segment profit was Energy & Transportation, which benefited from higher prices and a big jump in sales.

For the full year, Caterpillar increased its outlook for sales. The company now expects revenue to be modestly higher compared to 2024, up from a previous outlook that called for slightly higher sales. Tariffs are set to take a big bite out of the company's profits. Caterpillar expects the tariffs announced in 2025 to cost between $1.6 billion and $1.75 billion. This additional expense will push the company's adjusted operating margin toward the bottom of its annual target range.

While operating profit will take a hit, Caterpillar expects its free cash flow excluding the financial business to come in above the midpoint of its target range. This free-cash-flow metric was $3.2 billion in the third quarter.

Tariffs are a headwind for Caterpillar, but the company's strong performance and soaring backlog were enough to propel the stock higher in October.

Is Caterpillar stock a buy?

Shares of Caterpillar have rocketed higher this year, up about 50% year to date. The stock sank in April following the original tariff announcements, but it has staged an incredible recovery since then.

While Caterpillar is navigating the tariff situation well, the stock has become fairly expensive, especially considering that adjusted EPS declined in the third quarter. Based on the average analyst estimate for 2025 adjusted earnings, Caterpillar stock trades at a price-to-earnings ratio of roughly 30.

Caterpillar is a leader in its industry, but that valuation is optimistic considering the tariff-related challenges the company faces, as well as the highly uncertain state of the U.S. economy. With Caterpillar stock up so much this year, now may not be the best time to buy the stock.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.