Heavy machinery maker Caterpillardisappointed Wall Street with a second-quarter earnings miss on Friday and said economic growth in the U.S. and other developed economies was weaker than expected, sending its shares lower.
Douglas C. Pizac
Caterpillar
Although Caterpillar said demand was improving around the world and its outlook for China remained positive, it said that there are some signs of a slowdown there.
But investors focused on the earnings miss, which was partly caused by higher raw material prices, and the cautious tone in the company's comments. Not only did Caterpillar shares trade lower, but the company's outlook also weighed on other industrial stocks and the broader market.
“I think the big reason for the selloff is the fact they are lowering their global outlook to reflect obviously some of the things we’ve seen in Europe, but also the fact that people were expecting the core business would have seen a more robust improvement,” Brian Rayle, an analyst with Northcoast Research, told CNBC.
Disappointing Earnings
Caterpillar said net income rose to $1.02 billion, or $1.52 per share, in the second quarter, compared with $707 million, or $1.09 per share, a year earlier.
However, the latest period included certain acquisition-related expenses. Excluding those items, Caterpillar earned $1.72 a share.
Analysts had expected Caterpillar to report earnings of $1.74 a share on revenue of $13.56 billion, according to Thomson Reuters.
Revenue at the economic bellwether rose 37 percent to $14.23 billion from $10.4 billion a year ago.
"The bottom line disappointed," said Oliver Pursche, Co-Portfolio Manager of the GMG Defensive Beta Fund that holds Caterpillar shares. He said he may add to its position if they fall below $100.
"The area I'm concerned about is how they're managing their input costs," he said. "They appear to have a less capable hedging strategy."
Caterpillar faced headwinds from China and Japan, Pursche said, but it did a good job growing sales to record levels and has been especially successful at expanding in the critical Latin American market.
"Caterpillar tends to be very sensitive to macro issues," Pursche said. "A 6 percent sell-off (in the stock) is an over-reaction."
The company said the March earthquake in Japan reduced its operating profit by $60 million because it boosted costs.
But the negative impact from Japan is now past, it said.
Caterpillar — whose rivals include Terex , Manitowoc , Joy Global , Volvo and Japan's Komatsu — said it expects its recently closed Bucyrus acquisition to add $2 billion to this year's sales. It estimated 2011 revenue of $54 billion to $56 billion.
Excluding Bucyrus, Caterpillar expects 2011 profit of $6.75 to $7.25 per share, raising its range by 50 cents on either end. Analysts expect 2011 profit of $7.08 a share.
"We've seen the guidance move up, but not enough to keep the street happy," Rayle said.
"The forward guidance is a little bit disappointing," said
Eric Marshall, director of research for Hodges Capital Management, which recently sold its Caterpillar holdings. "The dealer statistics were so strong throughout the quarter, it built in a lot of pretty high expectations," he said. "People expected a little bit more."
The company's stock had rebounded after a steep sell-off during the 2008-2009 recession and in May reached a record high. Before Friday's results, the shares had outperformed both their industrial peers and the Dow Jones industrial average, of which Caterpillar is a component.
Slower Economic Growth
Global economic growth will be slower in 2011 than last year, Caterpillar forecast, and U.S. economic growth will be moderate, curtailed by "a lack of confidence in the business climate."
Like many US multinationals, Caterpillar has been able to increase profits despite a slow economic recovery in its domestic market, since other economies, including the BRIC countries Brazil, Russia, India and China, are expanding rapidly. Caterpillar derives more than a third of its sales from such emerging markets.
China, however, has taken steps to cool its economy and tame inflation, now at multiyear highs. Higher interest rates and other policy moves have raised concerns among investors that China's growth could slow abruptly.
"We've seen some softening of growth in China," CEO Doug Oberhelman said in a statement, but added that expectations remain positive and China is doing a good job of balancing growth and inflation.
Caterpillar has benefited in recent quarters from strong demand in emerging markets for its machinery used in construction and from mining and other industries flush from high commodity prices. Emerging markets remain robust, the company said.