Caterpillar fourth-quarter profit misses estimate badly, shares slide

January 28, 2019

By Rajesh Kumar Singh and Rachit Vats

(Reuters) – Caterpillar Inc on Monday reported quarterly profit that widely missed Wall Street estimates, hurt by softening demand in China and higher manufacturing and freight costs, sending shares tumbling more than 8 percent.

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 forecast 2019 adjusted profit of $11.75 to $12.75 per share, compared with the average analyst estimate of $12.73, according to IBES data from Refinitiv.

Chief Financial Officer Andrew Bonfield told Reuters that profits this year will be weighed down by a higher U.S. tax rate.

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.”

The company missed profit estimates for the first time in ten quarters, exacerbating fears of a global slowdown and helping lead to a sell-off in broader stock markets. The Dow Jones Industrial Average. was down 1.4 percent.

Caterpillar slid 8.2 percent at $125.63. Shares lost 19.4 percent in 2018, compared with a 15 percent drop in S&P 500 index and a 5.6 percent decline in the Dow.

Caterpillar, a bellwether 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.

Last week, the IMF cut its world economic growth forecasts, for a second time in three months, for 2019 and 2020. The downgrade came days after China, one of Caterpillar’s key markets, posted its slowest gross domestic product growth in nearly three decades.

China accounts for up to 10 percent of Caterpillar’s sales. But since it is one of the world’s largest commodities importers, China’s slowing economy can have a ripple effect on the company’s business, particularly on equipment sales to the mining and oil and gas industry.

Volatile oil prices brought down Caterpillar’s order book in the last quarter by about $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.

In Asia Pacific, which accounts for about 22 percent of Caterpillar revenues, the company is hoping for growth outside China as construction equipment sales in the world’s second largest economy are expected to be flat this year.

The company reported profit of $2.55 per share, well below the average analyst estimate of $2.99, according to IBES data from Refinitiv. Total sales and revenue in the quarter rose 11 percent year on year to $14.34 billion.

The Deerfield, Illinois-based company’s manufacturing costs shot up by 3 percentage points in the fourth quarter from the third quarter.

Bonfield said recent price increases along with cost cuts will help deal with higher material prices this year.

(Reporting by Rajesh Kumar Singh in Chicago and Rachit Vats in Bengaluru; Editing by Sriraj Kalluvila and Jeffrey Benkoe)