Caterpillar's profit outlook down: Is global economy declining?

The machinery maker is noting the impact of the United States-China trade war on its business.

    The ongoing US-China trade war and weaker construction orders have cooled demand for Caterpillar's heavy machinery, which analysts believe is a sign the global economy may be declining [File: Aly Song/Reuters]
    The ongoing US-China trade war and weaker construction orders have cooled demand for Caterpillar's heavy machinery, which analysts believe is a sign the global economy may be declining [File: Aly Song/Reuters]

    Industrial bellwether Caterpillar Inc reported a drop in sales in the United States and China in the third quarter, leading the company to cut its outlook for the year and adding to evidence that the global economy is firmly on the decline.

    The Illinois-based machinery maker, famous for its black-and-yellow diggers and earthmovers, also said the impact on its business from Beijing's and Washington's tit-for-tat trade war would now be lower than previously forecast.

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    However, Caterpillar said that cuts in the inventory carried by the network of retailers who sell its products would accelerate further in the fourth quarter of 2019 and see continued "moderate" pricing for its range of goods next year.

    Sales in the Asia-Pacific region, the company's third-largest market, fell 13 percent as it faced decreasing demand in China and competition from cut-price domestic rivals, while revenue in its main developed-world market in North America fell almost three percent.

    That drove an initial slide of five percent in the company's shares, now only marginally higher this year, and left analysts predicting little immediate improvement.

    "While inventory reduction should set the company up for easier comparisons in 2020, trends in all three end markets continue to decelerate, raising the question of how far ahead the market is willing to discount the shares," said Jefferies analyst Stephen Volkmann.

    The company's third-quarter profit for shareholders of $2.66 per share was well short of Wall Street estimates and the number for the same period a year ago - both set at $2.88 per share.

    Construction slump

    Caterpillar said the slump in Asia was led by a 29 percent plunge in construction equipment sales, and Chief Executive Officer Jim Umpleby said he expected overall demand in the fourth quarter to be flat. Total sales and revenue for the third quarter ended September 30 fell 5.6 percent from a year earlier to $12.76bn.

    "Sales in Asia/Pacific were lower across most of the region primarily due to lower demand in China, including unfavourable changes in dealer inventories, amid continued competitive pressures," the company said.

    Caterpillar's sales have improved since it managed to halt a four-year slide in 2016, but Wall Street analysts have been warning that demand in more than half of the company's end markets had peaked.

    Chief Financial Officer Andrew Bonfie said dealers had reduced the value of the Caterpillar stock they were holding by $400m in the third quarter and were likely to cut them by another $900m in the final three months of the year - a stark contrast to an $800m ramp-up in the third quarter a year ago.

    The company is seen as one of Wall Street's clearer gauges of the state of Chinese demand and its impact on big western multinationals.

    Caterpillar said the impact of tariffs imposed on its goods as a result of US President Donald Trump's trade war with Beijing would now be lower than the $250m to $350m range it gave earlier this year.

    The company also cut its 2019 expectations for profit to between $10.90 and $11.40 per share compared with a prior estimate of $12.06 to $13.06.

    SOURCE: Reuters news agency