Caterpillar, the world's top maker of earth-moving equipment, diesel engines and gas turbines, posted disappointing quarterly earnings on Friday and cut its full-year profit forecast.
Caterpillar shares on Friday lost $2.83, or 3.64 percent, trading at $74.83 on the New York Stock Exchange.
The company said several key industries it serves, including trucking and nonmetal mining, are "in recession," and its machinery sales to nonresidential builders are declining as fast as sales to the residential building industry, which it said was in "severe recession."
"That's definitely a trend that's somewhat disconcerting," said John Kearney, analyst at Morningstar.
"If commercial construction starts to go the way of residential construction, that's going to create some pretty difficult headwinds in 2008, 2009."
Caterpillar said third-quarter earnings rose 21 percent as strong sales overseas offset a slump in the U.S. residential construction market, but the results fell short of Wall Street expectations.
The Peoria, Illinois-based company reported a net profit of $927 million, or $1.40 a share, up from $769 million, or $1.14 a share, a year earlier.
Analysts, on average, had expected $1.43 per share, according to Reuters Estimates.
Revenue rose 9 percent to $11.44 billion, topping an average Wall Street forecast of $10.33 billion.
Caterpillar said a number of factors weighed on third-quarter results, including higher manufacturing and material costs, which increased core operating costs by $294 million.
The company lowered its forecast for full-year earnings, saying it now expects $5.20 to $5.60 per share, down from a previous estimate of $5.30 to $5.80. Its revenue forecast was unchanged at $44 billion.
Jim Owens, Caterpillar's chief executive, said the third-quarter results -- which came as the company grapples with the effects of the housing slump and a downturn in its on-highway diesel engine business -- demonstrated how its huge and growing overseas business stabilizes its earnings.
"Despite weakness in U.S. markets, our sales and revenues increased 9 percent," Owens said in a statement. "We continue to see remarkable growth outside of the United States, with particular strength in key industries like mining, oil and gas, electric power and marine engines."
But Caterpillar said it expects the weakness in the United States to continue into 2008.
It said the tightening of the credit markets in recent months has not had a significant impact on its own borrowings. But it said loan delinquencies of more than 30 days at its Cat Financial unit, which finances equipment purchases by the company's customers, jumped to 2.52 percent at Sept. 30 from 1.89 percent a year earlier.
"Most of this increase is related to North America and is specifically related to the downturn in the housing market," Caterpillar said.
Allan Meyers, co-manager of the AHA Diversified Equity Fund, which holds Caterpillar shares, said, "To us, it's kind of a continuation of the same theme.
"International continues to be strong, and domestic [the company is] working through the slowdown in engines and in the housing market. ...The guiding down is obviously bad, but they are very conservative anyway."
Softest Market in 50 Years
A company official said the North American trucking market is going through a downturn that may be the worst in more than 50 years.
Speaking on a conference call to discuss its third-quarter results, Doug Oberhelman, Caterpillar group president with responsibility for engines, said the market for those engines in North America was the softest he has seen in his career.
"We're experiencing the worst market ... probably since World War II," Oberhelman said. "Those of you who saw September net orders of 11,000 trucks in the industry would recognize that. That's the lowest I can remember in a long, long time."
Oberhelman said softness in the general economy was hitting shippers, and would continue to hurt engine and truck makers.
"GDP growth will drive freight tonnage," he said, "And freight tonnage is dropping both in rail and truck. And we see that continuing frankly right into spring.
"We won't know until spring or early summer where freight tonnage is going to land. We're worried about it. Certainly the winter is going to be slow for truck and truck engine production."