Caterpillar stock slides on profit miss, China sales forecast

The logo of Caterpillar is displayed on a screen on the floor of the New York Stock Exchange October 23, 2018. — Reuters pic
The logo of Caterpillar is displayed on a screen on the floor of the New York Stock Exchange October 23, 2018. — Reuters pic

NEW YORK, Jan 29 — Caterpillar Inc yesterday missed quarterly earnings estimates, hurt by soft Chinese demand, higher manufacturing and freight costs, sending shares of the heavy machinery maker tumbling as much as 10 per cent.

Industrial bellwether Caterpillar now expects construction equipment sales in China, the world's second-largest economy, to be flat this year. China, which accounts for up to 10 per cent of company sales, last week reported its slowest economic growth in nearly three decades.

Caterpillar posted a decline in construction equipment sales in the Asia-Pacific region in the latest quarter due to the cooling China demand.

Since China is one of the world's largest commodities importers, its slowing economy is having a ripple effect on global commodities prices, which can also hurt the company's equipment sales in the mining and oil and gas industry, for example.

Caterpillar downplayed the slump in China, citing a “very strong” performance a year ago, but did not break out sales. Chinese construction demand was up 40 percent in 2018 after doubling in 2017.

Caterpillar forecast 2019 adjusted profit of US$11.75 to US$12.75 (RM48.42-RM52.54) per share, compared with the average analyst estimate of US$12.73, according to IBES data from Refinitiv. Sales for the year are expected to increase modestly.

Chief financial officer Andrew Bonfield said profits this year will be weighed down by a higher US tax rate and increased freight and material costs.

“We expect favourable price realisation to be mostly offset by cost headwinds,” he told analysts on a conference call.

Caterpillar, a proxy for global economic activity, benefited in the past year from what the International Monetary Fund called the strongest global growth surge since 2010.

However, a tariff war between the United States and trade partners including China has stoked fears of a global slowdown.

The tariffs cost the company over US$100 million last year. No relief was expected from higher import duties this year, the company said.

Lawrence De Maria, a William Blair analyst, said the 2019 forecast was "indicative of slowing growth and a maturing cycle that implies peak markets, and effectively may put a lid on any cyclical industrial rally for now."

In the quarter, the Deerfield, Illinois-based company reported an adjusted profit of US$2.55 per share, well below the average analyst estimate of US$2.99, according to IBES data from Refinitiv. Total sales and revenue in the quarter rose 11 per cent year on year to US$14.34 billion.

Manufacturing costs shot up by 3 percentage points in the fourth quarter from the third quarter.

An increase in the provision for credit losses and write-offs in its financial products segment also cut into fourth-quarter earnings for the world's largest heavy-duty equipment maker.

The company posted lower-than-expected earnings for the first time in 10 quarters, helping propel a sell-off in broader stock markets. The Dow Jones Industrial Average. was down 1.2 per cent.

Chief executive officer Jim Umpleby told investors on the call that the company was closely monitoring costs and was in better shape to handle any market downturn.

Caterpillar slid 8.9 per cent at US$124.70 in afternoon trading, but fell as low as US$123.15 early in the session. Shares lost 19.4 per cent in 2018, compared with a 15 per cent drop in S&P 500 index and a 5.6 per cent decline in the Dow.

Volatile oil prices brought down Caterpillar's order book in the last quarter by about US$800 million from the September quarter.

The company expects volatile oil prices to hurt its energy and transportation business this year. However, it anticipates that higher commodities prices will continue to drive capital expenditures in the mining industry, underpinning demand for heavy construction and quarry machinery.

Caterpillar spent US$5.8 billion in shares buybacks and dividend payments and US$1.17 billion in capital expenditure in 2018. It ended the year with a cash balance of US$7.9 billion. — Reuters

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