Caterpillar’s Shares Tumble on Disappointing Profit Outlook

October 23, 2018 Updated: October 23, 2018

CHICAGO—Caterpillar Inc. disappointed investors on Oct. 23 by not raising its 2018 earnings forecast yet again, raising fears that the heavy-duty equipment maker may be signaling a slowdown despite posting better-than-expected quarterly profits.

The stock tumbled after the opening bell on Wall Street, weighing on the overall U.S. stock market. The stock was last trading down 9 percent at $117.11. The Dow Jones Industrial Average, which includes Caterpillar, was down about 440 points on Oct. 23.

The company kept unchanged the 2018 adjusted profit per share outlook of $11.00 to $12.00 per share, which did not go down well with investors who were expecting yet another upward revision in the earnings guidance.

“People were hoping that they would at least narrow the (profit outlook) range, if not raise it little bit,” said Stephen Volkmann, equity analyst at Jefferies. “Obviously, neither of those things happened. Given the strong quarters CAT has put up until now, it has got to be a little bit of disappointment for the bulls.”

The Deerfield, Illinois-based company has boosted the full-year profit outlook twice this year, betting on a global economy that is poised to record its strongest growth since 2011.

However, the weakest pace of economic growth in China since the global financial crisis and a cut in the global economic growth outlook for 2018 and 2019 have turned investors wary.

Caterpillar shares are down about 25 percent since late January amid deepening U.S.-China trade tensions and soaring raw material and freight costs for local manufacturers. Shares of other major industrials, including 3M Co., are also in “bear market” territory, down 20 percent or more from their highs.

Swedish truck maker Volvo, which also makes construction equipment and engines, last week said that demand in the Chinese construction market was slowing and could fall as much as 10 percent next year.

Caterpillar does not break out its China revenues. But analysts say the world’s biggest equipment maker has been gaining market share in the country’s excavation market at the expense of Volvo and Japanese companies such as Komatsu Ltd. and Hitachi Ltd.

In the latest quarter, non-residential building and infrastructure activities in the world’s second-largest economy powered a 19 percent jump in Caterpillar’s construction equipment sales in Asia-Pacific.

CAT said most of its end markets are continuing to improve, helping it post higher sales across the three primary business segments.

However, in probably a sign of softening demand, the order backlog at the end of the third quarter was about $400 million lower than the previous quarter, with decreases across the three primary segments. This comes a day after the company reported a further slowdown in global machine retail sales growth.

Caterpillar also acknowledged an increase in manufacturing costs in the latest quarter due to elevated freight costs, and higher steel prices, and import tariffs.

It said tariffs will cost it about $40 million in the latest quarter. However, for the full year, it now expects the impact to be at the low end of the previously provided range of $100 million to $200 million.

To offset the rising input cost, it will increase the prices of its machines and engines in the range of 1 to 4 percent globally from January 2019.

For the third quarter, adjusted profit came in at $2.86 a share, up from $1.95 a share, last year. Analysts on average had expected $2.85 a share, according to Refinitiv.


By Rajesh Kumar Singh