Caterpillar investors fearful as US-China trade war drives up costs
Caterpillar left investors concerned on Tuesday after the heavy-duty equipment maker warned that the US’s trade war with China was driving up the cost of its raw materials and dampening the outlook.
Shares in the US firm, considered a bellwether for the manufacturing sector, fell more than 7% after it failed to raise its 2018 earnings forecast, prompting fears that a slowdown may be ahead.
Caterpillar said: “Manufacturing costs were higher due to increased material and freight costs.
“Material costs were higher primarily due to increases in steel prices and tariffs. Freight costs were unfavorable primarily due to supply chain inefficiencies as the industry continues to respond to strong global demand.”
Share fell even though Caterpillar reported an adjusted profit rising to $2.86 a share in the third quarter, from $1.95 a share last year.
However, the company kept the 2018 adjusted profit per share outlook of $11.00 to $12.00 per share unchanged, which did not go down well with investors expecting another upward revision in the earnings guidance.
“People were hoping that they would at least narrow the [profit outlook] range, if not raise it little bit,” Stephen Volkmann, an equity analyst at Jefferies, said. “Obviously, neither of those things happened. Given the strong quarters CAT has put up until now, it has got to be a little bit of disappointment for the bulls.”
Caterpillar reported an adjusted profit of $2.86 a share in the third quarter, compared with $1.95 a share last year. Analysts on average had expected earnings of $2.85 a share, according to Refinitiv.
The Deerfield, Illinois-based company has boosted its full-year profit outlook twice this year, betting on a global economy poised to record its strongest growth since 2011.
With China’s economic growth slowing to its weakest pace since the global financial crisis, however, and the International Monetary Fund cutting the global economic growth forecasts for 2018 and 2019, investors have turned cautious.
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The company’s shares have lost about 25% of their value since late January as trade tensions between the US and China deepen and raw material and freight costs for local manufacturers soar.
In a probable sign of softening demand, the order backlog at the end of the third quarter was about $400m lower than the previous quarter, with decreases across the three primary segments.
Caterpillar also acknowledged an increase in manufacturing costs in the latest quarter as a result of elevated freight costs, and higher steel prices and import tariffs.
The company said tariffs will cost it about $40m in the latest quarter. For the full year, however, it expects the impact to be at the low end of the previously provided range of $100m to $200m.
To offset the rising input cost, it will increase the prices of its machines and engines by between 1% and 4% globally from January 2019.