Caterpillar Net Falls 6.4% on Higher Material Costs
October 22nd, 2008 | by mantrionline |Caterpillar Inc., the world’s largest maker of bulldozers and excavators, said third-quarter profit fell 6.4 percent, missing analysts’ estimates as costs rose for materials including steel and fuel.
Net income declined to $868 million, or $1.39 a share, from $927 million, or $1.40, a year earlier. Sales rose 13 percent to $13 billion, the Peoria, Illinois-based company said today in a statement.
Chief Executive Officer Jim Owens reaffirmed the company’s 2008 forecast and put off issuing its 2009 outlook because of “substantial turmoil in financial markets.” Higher costs for fuel, steel and other materials pushed up manufacturing expenses by $442 million from a year earlier, overshadowing price increases of about $385 million. The company plans to lift prices another 5 percent to 7 percent in January.
“They continue to be hit by raw material costs,” said Brian Rayle, an analyst with FTN Midwest Research in St. Louis. He has a “neutral” rating on the stock. Pricing “looks a little tough; whatever they announce, they never fully get.”
Sales exceeded the $12.1 billion average of 15 analysts’ estimates compiled by Bloomberg. The average profit estimate was $1.41 a share.
Caterpillar fell $2.07, or 5.1 percent, to $38.83 at 4 p.m. in New York Stock Exchange composite trading. The stock has declined 46 percent this year.
Caterpillar Forecasts
For the full year, Caterpillar reiterated its projected earnings of $6 a share and sales of more than $50 billion. Analysts, on average, expect $6.06 a share and $49.5 billion in revenue.
The company, which typically issues 2009 projections in its third-quarter reports, expects next year’s sales to be “about the same” as this year as mining and energy companies replace aging fleets. The company laid off an unspecified number of workers at its plants in Leicester, U.K.; Sanford, North Carolina; and Grenoble, France. The move was part of normal flexible scheduling as production volumes changed, Chief Financial Officer Dave Burritt said.
“Growth will hit a bump as a result of the recession, but it’s not going to stop the world’s need for infrastructure,” Owens said on a conference call today.
Material costs including steel are expected to put pressure on earnings this quarter, said Mike DeWalt, director of investor relations. Hot-rolled steel sheet, the benchmark U.S. product, reached a record $1,068 a ton in July, according to Purchasing Magazine data. The price averaged $1,032 during the quarter, more than twice the year-earlier period.
“There will be a similar amount of pressure on the fourth quarter” from costs, Burritt said in an interview with Bloomberg. “Material costs don’t change overnight, but the trends are down.”
Regional Results
International sales grew seven times as fast as North American revenue, as slowing home construction and tighter lending restrictions in the U.S. cut sales of backhoes and excavators. North American revenue rose 3 percent, to $5.14 billion, as price increases countered a decline in sales volume.
Sales in the Asia Pacific region climbed 38 percent, to $2.3 billion, as spending on housing construction rose by a third in China and coal mining demand grew in Australia and Indonesia. Building in Brazil and oil and natural gas production in Mexico drove a 32 percent gain in Latin American sales, to $1.51 billion.
In Europe, Africa and the Middle East, revenue rose 11 percent to $4.04 billion, on demand for engines used in power generation, commercial boats and mining equipment.
“The emerging markets have been helping Caterpillar hold up quite strongly,” said Sarah Hunt, an analyst at Alpine Woods Capital Investors LLC, based in Purchase, New York, in an interview with Bloomberg Television.
Economic Forecasts
Much of the developed world will be in a recession next year, the company said today. It expects world economic growth to slow to 2.8 percent this year from 3.8 percent in 2007. Growth next year may be less than 2.5 percent, the slowest since 2002. Caterpillar is not expecting “meaningful improvement” in the U.S. economy before late 2009, and projects a later recovery in Japan and Europe.
The company in July projected U.S. housing starts would be 980,000 this year, the lowest since 1945. Housing starts through September were on pace for 941,000 in 2008, according to the U.S. Commerce Department.
Owens, 62, is relying on mining demand in the Middle East and Asia to lift sales. The company has a three-year backlog of orders for mining trucks over 100 tons and is adding production capacity to meet demand. About 57 percent of mining trucks that size are over 10 years old and are due to be replaced, he said.
Capital Investments
Owens is investing $1 billion in emerging markets in the next three years, primarily in China. He is spending $100 million to triple excavator capacity at its Shandong SEM Machinery Co. unit in northern China. The company plans to invest another $200 million in the next four years to increase engine and machinery production in India as demand for backhoe loaders used in construction has quadrupled there.
“No doubt there will be some dampening of the appetite” for capital expansion, Owens said. “It will still be a fairly significant capital number because we, quite frankly, have very solid growth opportunities, and we need to expand capacity to meet those.”
