Caterpillar Inc. (CAT) stock plunged Thursday after the heavy equipment maker reported better-than-expected third-quarter 2026 earnings and revenue but warned of higher tariff costs and margin pressure.

The company maintained its full-year sales growth forecast but expects adjusted operating margin near the bottom of its target range.

Beating the Street, and Then Some

Caterpillar reported adjusted earnings of $7.20 per share, beating analysts' consensus estimate of $7.08. Earnings rose 45.5% from $4.95 per share a year earlier.

Revenue increased 17.3% year over year to $20.682 billion from $17.638 billion, topping Wall Street's estimate of $20.545 billion.

The growth reflected higher sales volumes and $663 million in favorable pricing.

GAAP earnings increased to $7.13 per share from $4.88 a year earlier.

Operating profit jumped 38% to $4.214 billion, while operating margin expanded to 20.4% from 17.3%. Adjusted operating margin improved to 20.6% from 17.5%.

Record Backlog and the AI Power Grab

Caterpillar's order backlog reached a record $78.1 billion, up $38.2 billion from a year earlier and $6 billion from the previous quarter.

"Our third-quarter results reflect the durability of our end markets, with strong order rates and a record backlog," Chairman and CEO Joe Creed said.

Retail sales rose 36% in Power & Energy, 20% in Construction Industries and 4% in Resource Industries.

Power & Energy revenue increased 18% to $8.784 billion, while segment profit jumped 31% to $2.143 billion. Operating margin reached 24.4%.

Power Generation sales surged 30%, driven by demand for turbines, related services and large engines, primarily for data center applications.

Creed said demand from cloud computing and backup power applications remains strong. He added that the company has visibility into demand extending beyond its existing order backlog.

Creed expects moderate year-over-year sales growth in Power & Energy during the fourth quarter, while Construction Industries sales are expected to remain largely unchanged.

He also acknowledged ongoing challenges in the Middle East but expects limited impact on sales to customers in Europe, the Middle East and Africa.

Construction and Mining Keep Digging

Construction Industries revenue climbed 18% to $7.983 billion, while segment profit rose 33% to $1.831 billion. Operating margin increased to 22.9%.

Resource Industries revenue grew 15% to $4.615 billion, while segment profit increased 14% to $622 million. However, operating margin slipped to 13.5%.

Caterpillar generated $4.4 billion in enterprise operating cash flow and $3.8 billion in Machinery, Power & Energy (MP&E) free cash flow.

The company ended the quarter with $7.9 billion in enterprise cash and returned approximately $2 billion to shareholders, including $1.2 billion in share repurchases and nearly $750 million in dividends.

Tariffs: The $2.2 Billion Headwind

Caterpillar reported approximately $600 million in third-quarter tariff costs, excluding $128 million in recoveries related to tariffs imposed under the International Emergency Economic Powers Act (IEEPA).

The company expects another $600 million in fourth-quarter tariff costs, bringing its projected full-year 2026 tariff expenses to approximately $2.2 billion, excluding IEEPA recoveries.

CFO Kyle Epley said the company continues to expect Construction Industries to account for approximately 50% of tariff costs, with Power & Energy and Resource Industries each accounting for about 25%.

Caterpillar maintained its 2026 forecast for sales growth in the mid-to-high teens.

However, the company expects adjusted operating margin near the bottom of its target range, excluding tariff recoveries.

Caterpillar also expects MP&E free cash flow in the upper half of its annual target range of $6 billion to $15 billion.

CAT Price Action: Caterpillar shares were trading down 9.53% at $645.36 at the time of publication on Thursday, according to market data.