Caterpillar pours cold water on manufacturing, energy sector hopes

Caterpillar (NYSE: CAT), the world’s no.1 heavy machinery maker, posted on Wednesday disappointing earnings driven mainly by its construction division, the major contributor to earnings, in yet another sign of an ongoing slowdown in manufacturing and volatility in the energy sector.

The Deerfield, Illinois-based firm, whose large exposure to China makes it a proxy for the global impact of trade tensions, reported earnings of $1.62 billion, or $2.83 per share in the second quarter of the year. In 2018, it earned $1.71 billion, or $2.82 per share in the same period.

Caterpillar attributed the results, which were well short of the $3.12 Wall Street analysts were expecting, to slower activity in China, which took a toll on construction equipment sales in Asia.

Caterpillar’s large exposure to China makes it a proxy for the global impact of trade tensions

Latin America reported flat sales due to reduced construction activity, while Europe’s sales drop was mainly attributed to currency headwinds.

Energy and transportation revenue fell by 4%. The machinery maker blame the division’s results on lower demand in the Permian Basin. The largest US oil patch is experiencing a slowdown in fracking activity as drilling companies rein in spending.

Its performance was also affected by a weakening energy sector. In the past three months, oil prices have dropped by about 14%, while natural gas is down more than 10%. Crude prices are down 17% over the past year, while natural gas is down almost 18%.

Higher material costs and the strong US dollar also weighed on some business lines, the world’s biggest earthmoving equipment maker noted.

Caterpillar still expects full-year earnings between $12.06 and $13.06 per share, but it anticipates being at the lower end of that range.

“Based on everything that we see we believe overall the market demand will be stable and we have mentioned the fact that we have some competitive pricing pressures from local competitors,” chief executive Jim Umpleby said on the earnings call.

“We are suddenly taking steps to ensure our competitiveness long-term in China. We’re introducing a number of GC products that will help us compete as well but again, we feel good about our forecast there in China,” he noted.

The results from Caterpillar, which is considered a reliable bellwether of global economic activity, come amid simmering trade tensions that partly triggered the International Monetary Fund’s decision to cut global growth forecast earlier this week.