The trade war is stinging Caterpillar, and its outlook is dimming

Caterpillar, stung by the trade war and global economic slowdown, posted a surprise drop in third-quarter profit as sales slumped in nearly every region around the world.

The world’s largest maker of construction and mining equipment warned on Wednesday that more pain is coming. Caterpillar, a bellwether for the global economy, dimmed its 2019 earnings outlook. The company is moving swiftly to slash production and is exploring ways to cut costs.

Caterpillar blamed the gloomy results on a decline in demand from dealers that supply the company’s machinery to customers. Dealers slashed their inventories by about $400 million during the quarter, a sharp swing from a year earlier when they boosted inventories by about $800 million.

“We believe dealers reduced inventory due to uncertainty in the global economy resulting from trade tensions and other factors,” CEO Jim Umpleby told analysts during a conference call.

The company’s revenue dropped 6% to $12.8 billion, significantly missing Wall Street’s expectation for a slight increase. Per-share profits unexpectedly declined 8%.

Caterpillar expects these trends to continue.

C
aterpillar now anticipates full-year sales will be modestly lower and it significantly dropped earnings guidance.

The company said it will cut production to meet weaker demand, but promised to be flexible in response to the “very fluid” global economic environment. Caterpillar executives said they will decide in the coming months on whether to launch a major restructuring plan aimed at slashing costs.

Caterpillar said third-quarter sales decreased in all three of its divisions, as well as in all regions except Latin America, where they were flat.

Not surprisingly, the Asia-Pacific region, the epicenter of the US-China trade war, fell by the largest margin. Sales there declined 13%, driven by lower demand in China for construction equipment. China recently reported its weakest economic growth since 1992.

Caterpillar’s sales in North America dipped by a more modest 3%.

Like other manufacturers, Caterpillar has been hit by a slowdown in the mining industry. Caterpillar’s resource industries division suffered a 12% decline in sales, due in part to weakness in the coal industry.

“We continue to believe we are in the early stages of a multi-year recovery in mining,” Umpleby said. “However, miners are cautious due to economic uncertainty.”

Energy was another weak spot for Caterpillar, which makes pumps and other equipment for oil drilling. Revenue fell 9% in the oil and gas segment and Caterpillar said industry demand “remains relatively depressed.”

Despite the economic trouble, Caterpillar pledged to continue to reward shareholders by returning plenty of cash through buybacks and dividends. Caterpillar repurchased $1.2 billion of stock during the third quarter and expects sizable buybacks through the end of the year.

Caterpillar’s stock dropped about 1%, recovering from an initial 7% plunge in premarket trading immediately after results were posed.

Caterpillar’s results come a day after Hasbro revealed that the trade war is eating into its profit and warned of potential price hikes. The toymaker’s stock plummeted nearly 17%, marking its worst day since December 2000.