Caterpillar earnings down on weak U.S. sales

CHICAGO (Reuters) - Caterpillar Inc (CAT.N), the world's top maker of earthmoving equipment, diesel engines and gas turbines, said on Friday quarterly earnings fell more than expected due to lower truck engine sales, weakness in North American construction markets and higher production costs.

The results, which the company called disappointing, sent Caterpillar shares down more than 8 percent in morning trading and weighed on the whole market amid worry the profit miss might be the first in a series from the heavy equipment industry. But the consensus was that the issues holding back Caterpillar were largely internal.

Caterpillar's stock, often a bellwether for the wider market, enjoyed a long, sustained rally in recent years as the company benefited from almost unprecedented demand in all of its markets, including residential construction and the oil, gas and mining industries.

But some analysts said that left the stock priced for perfection just as two of Caterpillar's top North American markets, the on-highway diesel engine market and the construction sector, began to sour simultaneously.

"This is kind of correcting some of the over-exuberance," said John Kearney, an analyst at Morningstar.

Caterpillar said second-quarter net profit fell 21 percent to $823 million, or $1.24 a share, from $1.05 billion, or $1.52 a share, a year earlier.

Sales and revenue rose 7 percent to $11.36 billion. Stripping out $743 million in revenue generated by its financial products unit, Caterpillar reported machinery and engine sales of $10.61 billion.

Analysts, on average, expected the Peoria, Illinois-based company to report a profit of $1.49 a share on machinery and engine sales of $10.34 billion, according to Reuters Estimates.

'PRICE SQUEEZE'

Eli Lustgarten, an analyst at Longbow Securities, said Caterpillar's woes included a "massive negative price squeeze," as price increases were unable to keep up with the rise in costs.

Caterpillar said production inefficiencies at its truck- engine manufacturing operations, which it said were experiencing lower-than-anticipated volume because of new clean-air rules, played a big role in the jump in costs.

But Lustgarten said the squeeze was an annual occurrence and that, while it had come earlier this year than in the past, he expected it would correct quickly.

While Caterpillar's reputation as a bellwether made it tempting to read broader meaning into its earnings miss, analysts such as Ann Duignan at Bear Stearns and Robert McCarthy at Robert W. Baird & Co said the issues were largely confined to the Peoria-based company.

Kearney at Morningstar agreed.

"I don't think this is something systemic that's going to impact the rest of the industry. It's one quarter where costs got ahead of them," he said.

Kearney cited Eaton Corp (ETN.N), which operates in many of the same markets as Caterpillar and still managed to beat expectations earlier this week.

Cummins Inc (CMI.N), Caterpillar's arch-rival in diesel engines, is also dealing with the same downturn in the North American on-highway engine market. But in its most recent quarter, the Columbus, Indiana company was able to offset that with strength in its power generation business -- a business in which Caterpillar competes.

"The miss came from poor execution," Duignan wrote in a report following the release of the earnings.

Caterpillar acknowledged as much, saying internal costs, including those associated with the adoption of the so-called CAT Production System, added to its problems during the quarter.

Caterpillar shares were down $7.86, or 9 percent, at $79.12 in midday trading on the New York Stock Exchange after earlier slipping as low as $78.26.