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Caterpillar's Q2 Adjusted Operating Margin Rebounds: Is the Worst Over?
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Key Takeaways
Caterpillar's adjusted operating margin rose 430 bps to 21.9% in Q2 2026.
Higher sales volumes and favorable pricing more than offset rising costs, including tariffs.
Caterpillar raised 2026 sales and revenue growth guidance to the mid-to-high teens.
Caterpillar Inc. (CAT - Free Report) delivered a notable improvement in profitability in the second quarter of 2026, with adjusted operating margin expanding around 430 basis points year over year to 21.9%. CAT had last reported a year-over-year improvement in adjusted operating margin in the second quarter of 2024.
The improvement came despite continued cost pressures. Cost of sales increased 18% year over year in the second quarter of 2026, reflecting higher manufacturing expenses. SG&A and R&D expenses also rose 19% and 12%, respectively. However, higher sales volumes and favorable pricing more than offset these cost increases, driving the sharp improvement in adjusted operating margin. The quarter included $392 million of expected International Emergency Economic Powers Act (IEEPA) tariff recoveries.
Tariff-related costs have been a major reason for the deterioration in the company’s operating margins, with rising input and manufacturing expenses being a woe.
Cost of sales increased 11% to $44.7 billion in 2025. Adjusted operating margin contracted around 350 basis points year over year to 17.2% in 2025. Total tariff impacts for 2025 reached about $1.8 billion and are expected to persist in 2026 as well.
Management expects full-year 2026 tariff costs to be around $2.2 billion. This excludes any additional IEEPA tariff recoveries in the second half of the year.
Against this backdrop, the second-quarter margin expansion is particularly encouraging. Caterpillar has also raised its 2026 outlook and now expects sales and revenues to grow in the mid-to-high teens compared with its previous forecast for low-double-digit growth. The improved outlook reflects healthy demand across all three primary segments. Management expects adjusted operating margin to be near the lower end of its target range, excluding tariff recoveries.
The Zacks Consensus Estimate currently calls for 2026 revenues of approximately $78.8 billion, implying an adjusted operating margin near the lower end of Caterpillar’s 18-22% target range. That would still represent a meaningful improvement from the 17.2% margin reported in 2025.
Among peers, Terex Corporation (TEX - Free Report) reported a slight year-over-year decline in operating margin to 10.9% from 11% in the second quarter of 2026. Cost of goods sold surged 52%. Terex has raised its outlook for 2026 based on backlog visibility and synergy realization but tariffs still remain a headwind. Terex’s adjusted earnings per share guidance for 2026 is $4.70 - $5.10, with the midpoint implying a 0.6% dip year over year.
Komatsu Ltd. (KMTUY - Free Report) reported an operating margin of 14.5% in the April-June 2026 quarter compared with 15.4% in the year-ago quarter, down 0.9 percentage points. For fiscal 2026, Komatsu expects operating margin to be 12.9% compared with 13.7% in the prior fiscal due to the negative impacts of higher tariffs and cost increases, including rising procurement prices.
CAT’s Price Performance, Valuation & Estimates
CAT shares have gained 91.5% over the past year compared with the industry’s 76% growth.
Image Source: Zacks Investment Research
Caterpillar is currently trading at a forward 12-month price/earnings (P/E) of 26.93X compared with the industry average of 25.24X.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for CAT’s 2026 earnings indicates year-over-year growth of 39.4%. The earnings estimate for 2027 indicates 21.7% growth.
Image Source: Zacks Investment Research
Earnings estimates for Caterpillar for both 2026 and 2027 have moved up over the past 60 days, as shown in the chart below.
Image Source: Zacks Investment Research
Caterpillar stock currently carries a Zacks Rank #2 (Buy).
View the Zacks #1 Rank List
Image: Bigstock
Caterpillar's Q2 Adjusted Operating Margin Rebounds: Is the Worst Over?
Key Takeaways
Caterpillar Inc. (CAT - Free Report) delivered a notable improvement in profitability in the second quarter of 2026, with adjusted operating margin expanding around 430 basis points year over year to 21.9%. CAT had last reported a year-over-year improvement in adjusted operating margin in the second quarter of 2024.
The improvement came despite continued cost pressures. Cost of sales increased 18% year over year in the second quarter of 2026, reflecting higher manufacturing expenses. SG&A and R&D expenses also rose 19% and 12%, respectively. However, higher sales volumes and favorable pricing more than offset these cost increases, driving the sharp improvement in adjusted operating margin. The quarter included $392 million of expected International Emergency Economic Powers Act (IEEPA) tariff recoveries.
Tariff-related costs have been a major reason for the deterioration in the company’s operating margins, with rising input and manufacturing expenses being a woe.
Cost of sales increased 11% to $44.7 billion in 2025. Adjusted operating margin contracted around 350 basis points year over year to 17.2% in 2025. Total tariff impacts for 2025 reached about $1.8 billion and are expected to persist in 2026 as well.
Management expects full-year 2026 tariff costs to be around $2.2 billion. This excludes any additional IEEPA tariff recoveries in the second half of the year.
Against this backdrop, the second-quarter margin expansion is particularly encouraging. Caterpillar has also raised its 2026 outlook and now expects sales and revenues to grow in the mid-to-high teens compared with its previous forecast for low-double-digit growth. The improved outlook reflects healthy demand across all three primary segments. Management expects adjusted operating margin to be near the lower end of its target range, excluding tariff recoveries.
The Zacks Consensus Estimate currently calls for 2026 revenues of approximately $78.8 billion, implying an adjusted operating margin near the lower end of Caterpillar’s 18-22% target range. That would still represent a meaningful improvement from the 17.2% margin reported in 2025.
Among peers, Terex Corporation (TEX - Free Report) reported a slight year-over-year decline in operating margin to 10.9% from 11% in the second quarter of 2026. Cost of goods sold surged 52%. Terex has raised its outlook for 2026 based on backlog visibility and synergy realization but tariffs still remain a headwind. Terex’s adjusted earnings per share guidance for 2026 is $4.70 - $5.10, with the midpoint implying a 0.6% dip year over year.
Komatsu Ltd. (KMTUY - Free Report) reported an operating margin of 14.5% in the April-June 2026 quarter compared with 15.4% in the year-ago quarter, down 0.9 percentage points. For fiscal 2026, Komatsu expects operating margin to be 12.9% compared with 13.7% in the prior fiscal due to the negative impacts of higher tariffs and cost increases, including rising procurement prices.
CAT’s Price Performance, Valuation & Estimates
CAT shares have gained 91.5% over the past year compared with the industry’s 76% growth.
Image Source: Zacks Investment Research
Caterpillar is currently trading at a forward 12-month price/earnings (P/E) of 26.93X compared with the industry average of 25.24X.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for CAT’s 2026 earnings indicates year-over-year growth of 39.4%. The earnings estimate for 2027 indicates 21.7% growth.
Image Source: Zacks Investment Research
Earnings estimates for Caterpillar for both 2026 and 2027 have moved up over the past 60 days, as shown in the chart below.
Image Source: Zacks Investment Research
Caterpillar stock currently carries a Zacks Rank #2 (Buy).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.