Caterpillar drops the most since 2011 after industrial giant says costs are rising from tariffs

  • Caterpillar's stock dove 7.5 percent Tuesday after the company gave disappointing 2018 guidance and management pointed out costs were rising due to tariffs.
  • "Manufacturing costs were higher due to increased material and freight costs. Material costs were higher primarily due to increases in steel prices and tariffs," the company says.
  • The session proved to be CAT's worst day on Wall Street since 2011; the stock is down more than 31 percent from all-time highs clinched in January.

Shares of Caterpillar sank 7.5 percent Tuesday after the heavy machinery maker gave disappointing 2018 guidance and management pointed out costs were rising because of tariffs.

The company reiterated its prior 2018 adjusted earnings guidance to range of $11 to $12 per share, but Wall Street expected the company to raise that forecast. The lower range of that forecast fell short of the $11.65 EPS estimated by analysts surveyed by Refinitiv.

"Manufacturing costs were higher due to increased material and freight costs. Material costs were higher primarily due to increases in steel prices and tariffs," the company said. "Freight costs were unfavorable primarily due to supply chain inefficiencies as the industry continues to respond to strong global demand."

Later in the statement, the company said the impact of tariffs for third-quarter material costs was about $40 million. Caterpillar shares clinched their worst day on Wall Street since Aug. 8, 2011; the stock is down more than 31 percent from all-time highs hit in January.

"For the full year of 2018, we expect the impact of recently imposed tariffs will be at the low end of the previously provided range of $100 million to $200 million," the company said.

The Dow Jones Industrial component said it hopes to more than offset the impact of rising material costs by raising prices as well as "operational excellence and cost discipline."

The company said it notified its dealers in the third quarter of an upcoming price action of 1 to 4 percent worldwide on machines and engines with certain exceptions. The new, higher prices will take effect in January 2019, and are "a result of current industry factors and general economic conditions."

The stock fell even as the big machinery exporter said 2018 profit per share hit $2.88, a third-quarter record. After adjusting for restructuring costs and a tax benefit to adjust deferred balances, adjusted earnings per share in the third quarter of 2018 was $2.86, above the $2.85 expected by analysts polled by Refinitiv.

The results are 46 percent higher than a year earlier, when it reported earnings of $1.95 per share. Revenues of $13.51 billion topped Refinitiv survey expectations of $13.29 billion and are 18 percent higher year over year. The Deerfield, Ill.-based company's global workforce increased about 8,200 from the end of the third quarter of 2017 largely thanks to higher production volumes; it now employs 123,100 people worldwide.

"This was the best third-quarter profit per share in our company's history," said Caterpillar CEO Jim Umpleby. "Our global team continues to do excellent work focusing on our customers' success and executing our strategy for profitable growth."

It also said sales of its excavators, bulldozers and other heavy machinery rose 19 percent to $12.76 billion for the quarter. Some analysts, such as Melius Research's Rob Wertheimer, argued that despite the action on Wall Street, the fundamental story at Caterpillar remains strong.

"To be fair, CAT has really executed quite well so there's surprise to the upside," Wertheimer said during CNBC's "Power Lunch" on Tuesday. "I think that tariffs have introduced some uncertainty into the market and they're managing through that. And so as we kind of understand what that risk is, we can sort of price that in."

"Honestly, the biggest thing with CAT is: are we at a point in the cycle where we're at an economic peak? Are we at a point where their revenues are at peak?" the analyst added. "And the answer's just 'no.'"

Caterpillar's stock has slid in 2018 as concerns over the trade relationship between the United States and China persist. The company's stock was down 15 percent in October even before the company disclosed its earnings.

Seven months into the U.S. tariffs on imported aluminum and steel, Caterpillar is among several large American manufacturers trying to keep a lid on expenses to grapple with a 36 percent rise in the price of hot rolled steel over the past year.

The rising costs and the tit-for-tat tariff war with China have tarnished earnings outlook for big industrial companies with exposure to overseas markets. In announcing the metals tariffs in March, President Donald Trump argued that prior trade trends "destroyed" U.S. steel and aluminum companies.

"People have no idea how badly our country has been treated by other countries. By people representing us who didn't have a clue," Trump said at the time.

The tariffs of 25 percent on steel imports and 10 percent on aluminum imports is just one example of the Trump administration taking aim at foreign countries' trade practices. The president often criticizes foreign trade practices that he says harm American companies and undermine U.S. jobs.