Caterpillar cuts profit outlook as China construction sales slump

October 23, 2019

Caterpillar reported a drop in third-quarter profit as sales slumped in most regions around the world leading the company to cut its outlook for the year.

The world’s largest maker of construction and mining equipment, Caterpillar has long been viewed as a bellwether for the global economy.
Sales in Asia-Pacific, Caterpillar’s third largest market, fell 13 percent as it faced falling demand in China and competition from cut-price domestic rivals, while revenue in its main developed world market in North America fell almost 3 percent.

Caterpillar blamed the gloomy results on a decline in demand from dealers that supply the company’s machinery to customers. Dealers slashed their inventories by about $400 million during the quarter, a sharp swing from a year earlier when they boosted inventories by about $800 million.

“In the fourth quarter, we now expect end-user demand to be flat and dealers to make further inventory reductions due to global economic uncertainty,” said Jim Umpleby, Caterpillar chief executive officer said. “Caterpillar’s improved lead times, along with these dealer inventory reductions, will enable us to respond quickly to positive or negative developments in the global economy in 2020. We are expanding our offerings and investing in services, including digital capabilities, to drive long-term profitable growth, while continuing to achieve our Investor Day targets for improved financial performance.”

The company’s revenue dropped 6 percent to $12.8 billion, significantly missing Wall Street's expectation for a slight increase. Per-share profits unexpectedly declined 8 percent.

Caterpillar’s resource industries division, which includes its mining equipment, suffered a 12 percent decline in sales. The company said mining customers “are cautious due to economic uncertainty.” Caterpillar also pointed to weakness in the coal industry.

There are bright spots for Caterpillar, according to according to Karen Ubelhart, an analyst at Bloomberg Intelligence who wrote, “Earnings are still forecast to reach a record this year, and much of the bad news may already be reflected in the share price. The stock has risen about 5 percent in 2019, trailing the 15 percent gain in the Dow Jones Industrial Average. Also, mining-equipment demand has held up, and should help soften the blow from a slowdown in construction.”

“Mining equipment should lead segment growth, yet is only 15-20 percent of sales and earnings,” Ubelhart said in a note. When Caterpillar reports earnings, “commentary on China will remain a focus, as will significant deceleration in North American construction equipment demand.”

Caterpillar said the impact of tariffs imposed on its goods as a result of President Donald Trump’s trade war with Beijing would now be lower than the $250 million to $350 million range it gave earlier this year, Reuters reported. But it also cut its 2019 expectations for profit to between $10.90 and $11.40 per share compared with a prior estimate of $12.06 to $13.06.

The company’s third-quarter profit for shareholders of $2.66 per share was well short of Wall Street estimates and the number for the same period a year ago - both set at $2.88 per share.

Total sales and revenue for the third quarter ended Sept. 30 fell 5.6 percent from a year earlier to $12.76 billion.

 

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