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Caterpillar misses on earnings and gives weak guidance, cites China slowdown – stock plunges

Key Points
  • Caterpillar reports disappointing quarterly earnings but revenue exceeds expectations.
  • Caterpillar's guidance for 2019 profit was weaker than expected.
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Caterpillar EPS miss, revenue beats expectations

Caterpillar stock skidded Monday after the company reported earnings that were sharply lower than expected and guidance that was much weaker than expected.

The equipment manufacturer, which is considered a proxy for the global economy, pointed to tariffs and a slowdown in China as majors factor in its disappointing fourth-quarter results.

Caterpillar's shares fell 9.13 percent on Monday, losing $12.49 per share according to FactSet data. The major U.S. indexes posted declines Monday on poor outlooks from Caterpillar and chipmaker Nvidia.

Caterpillar said it now expects 2019 profit to increase to a range of $11.75 to $12.75 per share. Analysts had expected $12.73 per share. Its revenue only slightly exceeded expectations.

Here's how the company did compared with what Wall Street expected:

  • Adjusted earnings: $2.55 per share vs. $2.99 per share expected by analysts surveyed by Refinitiv
  • Revenue: $14.34 billion vs. $14.33 billion as expected by analysts surveyed by Refinitiv

The revenue results were 11 percent higher from a year earlier, when it reported revenue of $12.9 billion.

Caterpillar's results were hurt by a slowdown in sales in China, where economic growth has slowed to levels not seen in almost two decades amid a trade war with the United States.

Sales in the Asia/Pacific region declined due to lower demand in China and unfavorable currency rates. China represents 5 to 10 percent of Caterpillar's total sales and revenue, Chairman and CEO Jim Umpleby said on a call with investors

"Sales in Asia/Pacific declined due to lower demand in China, partially offset by higher demand in a few other countries in the region," the company said in its earnings press release. "Unfavorable currency impacts also contributed to the sales decline."

Caterpillar also said higher material and freight costs due to tariffs, steel prices and supply chain inefficiencies impacted its results.

The U.S. has imposed tariffs on $250 billion worth of Chinese goods ranging from consumer to industrial products. Beijing responded with tariffs on $110 billion in U.S. goods.

In December, Washington and Beijing agreed to a cease-fire in the trade war and promised to stop adding trade tariffs for 90 days. The countries have until March 2 to reach a resolution.

On a call with investors, Umpleby said Caterpillar will closely monitor costs and expects price to offset manufacturing cost increases in 2019.

"At some point there will be a market downturn," Umpleby said. "We're not calling that in '19. But whenever that does occur we're certainly in a better position to generate cash than we were in the last downturn."

Construction industry sales in the Asia/Pacific region declined 4 percent, or $64 million, from the same quarter a year earlier, according to Caterpillar.

"In Asia-Pacific, we expect construction growth in countries outside of China," Umpleby said on a call with investors. "Within China, the industry is very dynamic and there are a variety of forecasts. We will continue to monitor the situation but as of now we are forecasting the overall China market to be roughly flat in 2019 following two years of significant growth."

In North America, construction industry sales increased 17 percent in the quarter over a year earlier. The company said sales increased due to higher demand for new equipment, primarily to support oil and gas activities and non-residential building construction.

When Caterpillar announced disappointing guidance in its third-quarter 2018 statement, its stock fell 7.5 percent on Oct. 23 to its lowest levels since 2011. The industrial giant said costs were rising due to tariffs and increases in steel prices. Caterpillar said the impact of tariffs on material costs for the third quarter was $40 million.

The Illinois-based company told its dealers prices would rise by 1 percent to 4 percent worldwide on machines and engines with some exceptions to offset higher material costs.

Correction: This story was revised to correct when Caterpillar's stock fell 7.5 percent. It was on Oct. 23.

The Associated Press contributed to this report.

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Key Points
  • 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.