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Caterpillar cuts profit outlook as China construction sales slump

Published 10/23/2019, 12:17 PM
© Reuters. Caterpillar logo is pictured at the 'Bauma' Trade Fair in Munich

By Rachit Vats and Ankit Ajmera

(Reuters) - Industrial bellwether Caterpillar Inc (N:CAT) reported a drop in sales in the United States and China in the third quarter, leading it to cut its outlook for the year and adding to evidence that the global economy is firmly on the decline.

The Illinois-based machinery maker, famous for its black and yellow diggers and earthmovers, also said the impact on its business from Beijing and Washington's tit-for-tat trade tariffs would now be lower than previously forecast.

However, it said that cuts in the inventory carried by the network of retailers who sell its products would accelerate further in the fourth quarter and see continued "moderate" pricing for its range of goods next year.

Sales in Asia-Pacific, its third biggest market, fell 13% 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%.

That drove an initial slide of 5% in the company's shares, now only marginally higher this year, and left analysts predicting little immediate improvement.

"While inventory reduction should set the company up for easier comparisons in 2020, trends in all three end markets continue to decelerate, raising the question of how far ahead the market is willing to discount the shares," said Jefferies analyst Stephen Volkmann.

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.


Caterpillar said the slump in Asia was led by a 29% plunge in construction equipment sales and Chief Executive Officer Jim Umpleby said he expected overall demand in the fourth quarter to be flat.

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

"Sales in Asia/Pacific were lower across most of the region primarily due to lower demand in China, including unfavorable changes in dealer inventories, amid continued competitive pressures," the company said.

Caterpillar sales have improved since the company managed to halt a four-year slide in 2016, but Wall Street analysts have been warning that demand in more than half of its end markets had peaked.

Finance chief Andrew Bonfie said dealers had reduced the value of stock they were holding by $400 million in the third quarter and were likely to cut by another $900 million in the final three months of the year, a stark contrast to an $800 million ramp-up in the third quarter a year ago.

The company is seen as one of Wall Street's clearer gauges of the state of Chinese demand and its impact on big western multinationals.

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.

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.

© Reuters. Caterpillar logo is pictured at the 'Bauma' Trade Fair in Munich

Profit attributable to common stockholders fell to $1.49 billion in the third quarter from $1.73 billion, or $2.88 per share, a year earlier.

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