Caterpillar’s disappointing earnings send shares sliding

Caterpillar, the earthmoving equipment group, said it expected no growth in sales in China this year and only a "modest" increase worldwide as it projected disappointing earnings for 2019 that sent its shares sharply lower.

The company also reported earnings that were at the bottom end of the company’s forecast for 2018, and fell short of Wall Street expectations for the fourth quarter.

Shares opened about 8 per cent lower at $125.98 on Monday.

Although China represents only 5 to 10 per cent of Caterpillar’s revenues, the slowdown in sales there is very sharp after two years of rapid growth. It also highlights mounting concerns about the health of the country’s economy and particularly its industrial sector.

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Jim Umpleby, Caterpillar's chief executive, said in statement: "Our outlook assumes a modest sales increase based on the fundamentals of our diverse end markets as well as the macroeconomic and geopolitical environment."

Full-year profit in 2019 is expected to come in the range of $11.75 to $12.75 a share, which compares with a median forecast of $12.73, according to a survey of analysts by Thomson Reuters.

The reduction in guidance for earnings for this year in part reflects higher expectations for the tax rate, as well as the slowdown in sales growth.

In a presentation for investors, Caterpillar said it expected sales in China to be roughly flat this year compared to 2018. That would represent a sharp slowdown in a market that doubled in 2017 and grew 40 per cent last year.

Andrew Bonfield, the company's chief financial officer, said it was a "slowdown from a very rapid acceleration". After customers bought a lot of equipment in the past two years, he said, it was to be expected that they would not need to replace it immediately.

He said that demand in the North American market from the construction industry was still very strong, helped by a healthy economy and new pipelines being built by the oil and gas industry.

Tariffs on steel

Mr Bonfield added that the impact of US import tariffs on steel had been at the lower end of the company’s expectations, adding about $100 million to its costs. Last year the company announced price increases of 1 per cent to 4 per cent for its machinery, although Mr Bonfield acknowledged that posted price rises were not always realised in full.

Total revenue rose 11 per cent from a year ago to $14.3 billion in the three months ended December 31st, with the company pointing to higher sales volumes for construction equipment as a key driver. This was the highest since the fourth quarter of 2013, but barely matched the median forecast among analysts.

Adjusted earnings of $2.55 a share came in 44 US cents below Wall Street forecasts, while the $11.22 a share for the 2018 financial year came in at the low end of the company’s own range for $11-$12.

Sales in Asia/Pacific, the biggest contributor to revenue outside its home market of North America, declined in the quarter due to “lower demand in China”, although it said this was partially offset by “higher demand in a few other countries in the region”.

The company also said the strong US dollar also contributed to the sales decline. – Copyright The Financial Times Limited 2019