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Oct 23, 2018

Caterpillar plunges as outlook falls short of expectations

Caterpillar falls as costs set to rise

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Caterpillar Inc. (CAT.N) tumbled after disappointing analysts who expected a boost in its 2018 outlook.

Shares fell more than 10 per cent Tuesday as the mining and construction equipment maker repeated its warning about rising costs due to higher steel prices and U.S. tariffs. The company, which got pummeled in April after warning first-quarter results may be "the high watermark for the year," was again punished by investors concerned about its future.

Caterpillar, considered an economic bellwether, has lost 21 per cent of its market value this month as tariffs boost metal costs and trade frictions fuel demand concerns. The company said it will raise prices to make up for the rise in raw materials. The International Monetary Fund warned this month of “choppy” waters in the global economy, and analysts say some end-user industries may be reaching peaks in their growth cycles.

“This is likely to be a negative for Caterpillar, but also for industrials broadly that are having a hard time living up to heightened expectations,” said Larry De Maria, an analyst at William Blair & Co. “Markets are in a precarious situation, and under pressure again this morning, and Caterpillar’s stock will probably further weigh it down.”

Caterpillar said in a government filing that the impact of recently imposed tariffs was about US$40 million in third quarter, and the company sees the full-year impact of the tariffs at the low-end of the range of US$100 million to US$200 million. Caterpillar has notified dealers it would increase some prices 1 to 4 per cent worldwide starting in January.

The cost of benchmark steel in the U.S. has risen almost 30 per cent this year amid growing global demand and U.S. tariffs on the metal that have made domestic prices expensive compared with the rest of the world.

“Manufacturing costs were higher due to increased material and freight costs,” the company said in a statement Tuesday. “Material costs were higher primarily due to increases in steel prices and tariffs.”

In the fourth quarter, higher prices and spending discipline are expected to more than offset the rise in material and freight costs, the company said.

Many end markets are in early stages of recovery, and the company is seeing robust demand in other markets, Caterpillar Chief Executive Officer Jim Umpleby said on a conference call with analysts Tuesday. The company anticipates normal seasonal sales growth in the fourth quarter, he said.

Caterpillar is starting to see the impact of its mid-year price increase, and Umpleby expects its businesses to continue improving into 2019, he said.

Shares Repurchases

Chief Financial Officer Andrew Bonfield said on the call that the company has more cash than needed, and that it will focus on its share-buyback program. Repurchases in the fourth quarter are expected to be at least US$750 million, and will exceed that if the stock is undervalued, he said.

Third-quarter profit excluding one-time items was US$2.86 a share, higher than the US$2.85 average of 23 estimates compiled by Bloomberg. The company maintained its outlook for 2018 profit of US$11 to US$12 a share. Analysts expected it to earn US$11.65 a share this year.

Deerfield, Illinois-based Caterpillar was down 6.8 per cent to US$119.94 at 12:30 p.m. in New York. It was the second-worst performer in the S&P 500 Index.

The equipment maker plunged on Friday after Honeywell International Inc. said costs could be in the “hundreds of millions of dollars” from higher Chinese and U.S. tariffs. Earlier this month, Fastenal Co. slumped the most in six months after warning that new U.S. tariffs on China-sourced goods are “directly impacting" customers of the distributor of industrial and construction supplies.

Caterpillar’s “earnings were fine, they just weren’t great and people were hoping for great,” said Stephen Volkmann, a managing director of equity research at Jefferies LLC.