Caterpillar profit misses Street forecasts
Heavy machinery maker Caterpillar Inc. (CAT-N) disappointed Wall Street with a second-quarter earnings miss on Friday and said economic growth in the United States and other developed economies was weaker than expected, sending its shares down sharply.
The maker of equipment used in mining and construction raised its full-year sales and profit forecast and said its outlook for China remained positive despite some signs of a slowdown there.
But investors focused on the profit miss, partly caused by higher raw materials prices, and a cautious tone in the company's comments.
Net earnings rose 44 percent to $1.02 billion US, or $1.52 per share, in the second quarter, from $707 million or $1.09 per share a year earlier.
Excluding acquisition costs, Caterpillar earned $1.72 per share, 3 cents short of analysts' average forecast, according to Thomson Reuters I/B/E/S.
"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.
Second-quarter revenue rose 37 percent to a record $14.23 billion.
Caterpillar—whose rivals include Terex Corp., Manitowoc, Joy Global Inc., Volvo and Japan's Komatsu—said it expects its recently closed acquisition of mining equipment maker Bucyrus to add $2 billion to its sales this year. It estimated 2011 revenue of $54 billion to $56 billion.
Excluding acquisition costs, Caterpillar expects 2011 profit of $6.75 to $7.25 per share, raising its range by 50 cents on either end. Analysts expect $7.08.
"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
Caterpillar forecast slower global economic growth this year than in 2010, and moderate U.S. growth, curtailed by "a lack of confidence in the business climate."
Like many U.S. multinationals, Caterpillar has been able to increase profits, despite a slow economic recovery in its domestic market, thanks to rapid expansion in other economies, including the BRIC countries Brazil, Russia, India and China. 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," Caterpillar Chief Executive Doug Oberhelman said in a statement, but added that expectations remain positive. China is doing a good job of balancing growth and inflation, he said.
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.
Caterpillar closed its $7.6 billion acquisition of Bucyrus this month.