Caterpillar Profit Misses as Trade Strains Start to Bite

(Bloomberg) -- Caterpillar Inc. had the biggest profit miss in a decade as a China slowdown hit demand for its signature yellow construction and mining equipment, bearing out worries over trade tensions that pummeled global equities last quarter.

The Deerfield, Illinois-based company also issued a 2019 profit forecast range which, at the low end, was below the average of analysts’ expectations. The shares headed for the biggest loss since 2009.

Caterpillar, an economic bellwether, adds to gloom on growth after executives joined the International Monetary Fund last week in warning the global economy is slowing faster than expected. The cautionary view from the world’s largest maker of mining and construction equipment echoes recent outlooks from industrial mainstays Stanley Black & Decker Inc. and PPG Industries Inc.

“It just seems like overall things seem very soft, softer than expected, and really the overall future economic outlook is coming into play here,” Larry De Maria, an analyst at William Blair & Co., said by phone. The outlook “doesn’t bode well for the whole group.”

Caterpillar shares tumbled 9.8 percent to $123.47 at 1:08 p.m. in New York, the second-largest decline on the S&P 500 Index. A close at that price would mark the biggest drop for Caterpillar’s stock since March 2009.

This month, Stanley Black & Decker Chief Executive Officer Jim Loree called out stalling growth in China and Europe, and also cited construction markets in the U.S., saying rising interest rates started weighing on sales. Paint and industrial coatings maker PPG Industries CEO Michael McGarry said sales were hurt by “very weak” industrial production in China, with auto manufacturing down 16 percent last quarter.

“The retail sales for Asia-Pacific did show a decline in December, but this is on the back of two strong years,’’ Caterpillar Chief Financial Officer Andrew Bonfield said by phone. “However, when we look out into our guidance for 2019 we expect total excavator sales to be about flat year-on-year’’ in China.

“China represents between 5 percent and 10 percent of our total revenue, so it’s relatively small. North America is obviously the major market."

What Our Analysts Say...

A recovery in Caterpillar’s key markets of mining and construction generated double-digit revenue gains for the past two years, yet 2019 should grow at a considerably slower pace.

-- Karen Ubelhart, Senior Industrials Analyst, Bloomberg Intelligence

For more, read the full reaction note 

The company said it expects 2019 profit in a range of $11.75 to $12.75 per share. The average estimate among 28 analysts was for adjusted profit of $12.72 a share, according to data compiled by Bloomberg. Its fourth-quarter profit result was $2.55 per share, about 15 percent below estimates, the biggest miss since the fourth quarter of 2008.

“Our outlook assumes a modest sales increase based on the fundamentals of our diverse end markets as well as the macroeconomic and geopolitical environment,” Caterpillar CEO Jim Umpleby said in a statement Monday.

Umpleby said on a conference call with analysts that the company is better prepared to face a market downturn, when it occurs.

“At some point there will be a market downturn,” Umpleby said. “We’re not calling that in 2019. Whenever that does occur we’re certainly in a better position to generate cash than we were in the last downturn. We’ll be very cost-disciplined here moving forward."

Caterpillar Profit Misses as Trade Strains Start to Bite

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