Caterpillar's Earnings Increase 15%; Forecast Is Cut

Caterpillar Inc., the world's largest maker of earthmoving equipment, said third-quarter profit rose less than analysts forecast and predicted sales will weaken next year, citing a slowdown in the U.S. economy.

The stock had its biggest drop in 19 years in its heaviest trading volume ever. Caterpillar said net income rose 15 percent to $769 million, or $1.14 a share, from $667 million, or 94 cents, a year earlier. Sales gained 17 percent to $10.5 billion, the company said today in a statement.


Sales of construction equipment such as bulldozers will be less than the company anticipated as a housing slump triggers a period of slack economic growth, Chief Executive Officer James Owens said in the statement. Peoria, Illinois-based Caterpillar said dealers started cutting back inventory in the quarter and it expects a ``sharp drop'' in sales of truck engines.

``People are a bit shocked by the miss,'' said Steve Hoedt, an analyst at National City Corp. in Cleveland, which owns almost 500,000 Caterpillar shares. ``The outlook going forward is a bit disturbing. The economy on a global basis is falling.''

Caterpillar is a bellwether of the U.S. economy because its sales span industries from mining to oil to construction, making orders dependent on both consumers and corporate spending. The U.S. economy slowed to a 2.6 percent rate of growth in the second quarter, and Caterpillar said today that third-quarter growth was even slower, possibly less than 2 percent.

Shares of Caterpillar dropped $10.02, or 15 percent, to $59 at 4:04 p.m. in New York Stock Exchange composite trading. That marked the worst decline since the crash on Oct. 19, 1987. More than 67.6 million shares traded. The stock has gained 2.1 percent this year.

The stock, leader of a four-year rally that pushed the Dow Jones Industrial Average above 12,000, dragged the index down today. Agricultural-equipment maker Deere & Co. fell 3.3 percent. Engine maker Cummins Inc. lost 3.6 percent.

Dead Money

``Caterpillar is going to be dead money,'' said Gary Wolfer, who helps manage about $1 billion at Univest Trust Services in Souderton, Pennsylvania. ``I don't see any opportunity for the stock to appreciate much beyond current levels.''

Higher manufacturing expenses limited earnings in the third quarter, as core operating costs rose by $407 million from a year earlier. Prices for raw materials climbed, and as production volumes increased, so did the costs to support them.

Profit excluding costs of a legal settlement was $1.26 a share. Banc of America's Seth Weber had estimated profit at $1.35, matching the average of 14 estimates in a survey by Thomson Financial. Thomson doesn't disclose to Bloomberg what is included in the estimates. Sales estimates averaged $9.87 billion.

Housing, Interest Rates

The slowdown has been concentrated in consumer spending and housing, Caterpillar said. Except for housing, the company said its industries held up in the third quarter. Housing construction will decline from year-earlier levels for the rest of the year, depressing sales of smaller machines, the company said.

Caterpillar predicted decreases in U.S. housing starts, to about 1.75 million units in 2007. The slowing U.S. economy will prompt the Federal Reserve to cut interest rates in first half of 2007, probably by 50 to 100 basis points, Caterpillar said.

Caterpillar, which gets more than half its sales in the U.S., forecast revenue growth of 13 percent in 2006, instead of a previous goal of 12 percent to 15 percent. Profit will be $5.05 to $5.30, down from its estimate of $5.25 to $5.50.

In 2007, revenue will be little changed to up 5 percent, with per-share profit little changed to up 10 percent from the middle of its 2006 forecast.

Work to Do

``We can't speculate on what investors are doing,'' Chief Financial Officer David Burritt said in an interview. ``We're focusing on what we can control. We have work to do on our production facilities.''

Caterpillar is working to eliminate inventories, so it can produce machines as dealers order them. Burritt wouldn't say how much the company could save. Most of the growth in 2007 will come from higher prices, Caterpillar said. The company said it expects dealers to reduce inventories ``significantly.''

Owens, 60, plans to raise prices as much as 7 percent next year. The company already had increased prices more than 13 percent in the past two years, bolstering profit.

Sales of machines rose 15 percent in the quarter, led by demand from Europe, Africa and the Middle East. Those sales offset slowing demand for large machines in the U.S., where mine permit delays hampered growth. Production problems for new trucks also limited gains, investor relations director Mike DeWalt said on a conference call. Operating profit rose 2 percent.

Competition in China is increasing. Komatsu Ltd., the second- biggest maker of earthmoving equipment, plans to get 10 percent of its construction machinery sales there by 2010.

Engines sales rose 23 percent, as higher prices of oil and gas drove demand for turbines. Operating profit rose 50 percent. The company makes power generators used on oil platforms, and equipment that converts oil field gases and methane into energy.

The finance unit reported a 15 percent increase in sales, helped by higher interest rates. Operating profit rose 39 percent.

Machinery accounted for 63 percent of sales last year, with engines at 30 percent, and financial products made up the rest.

Get paid to blog