Caterpillar slips as higher costs dent margins at construction business

(Reuters) - Caterpillar Inc spooked investors for a second straight quarter as rising costs hit margins in its construction equipment business and tepid sales in the Asia Pacific region pointed to continuing subdued growth in China.

FILE PHOTO: A row of excavators are seen at the Caterpillar booth at the CONEXPO-CON/AGG convention at the Las Vegas Convention Center in Las Vegas, Nevada, U.S. March 9, 2017. REUTERS/David Becker/File Photo

Shares of the company, considered a bellwether for economic activity whose results often influence global stock market sentiment, fell as much as 4 percent, overturning an initial rise due to overall results that were flattered by a tax gain.

The latest results come after the world’s largest heavy duty equipment maker warned in the fourth quarter that construction activity in China could cool after two years of significant growth.

Chief Financial Officer Andrew Bonfield, however, said on Wednesday that the industry saw stronger-than-expected activity in China ahead of the Chinese New Year, though full-year sales would remain flat for Caterpillar in the region.

China accounts for up to 10 percent of the company's sales and is critical to its growth prospects as it is one of the world's largest commodities importers. Steady growth here in China the first quarter, coming off a sharp slowdown in the previous quarter, has added to optimism that the country's economy may be starting to stabilize.

Caterpillar said sales of construction equipment in the Asia-Pacific region were flat in the first quarter, excluding the impact of currency. They fell 4 percent on a reported basis.

“Caterpillar has most exposure to China in their construction industry business and that business was just a bit disappointing on revenue and margins,” Jefferies analyst Stephen Volkmann said.

Operating margin in the construction equipment business, Caterpillar’s biggest, fell to 18.5 percent from 19.7 percent a year earlier as higher manufacturing and freight costs ate into profits.

The company reported first-quarter construction revenue of $5.87 billion, missing analysts’ expectation of $5.95 billion, according to Refinitiv IBES.

Still, overall revenue rose about 5 percent to $13.5 billion and beat estimates, thanks to a 7 percent rise in sales in North America, its biggest market.

The company also raised its full-year profit forecast as it booked a gain in the first quarter related to tax reforms.

Caterpillar said it now expects 2019 profit of $12.06 per share to $13.06 per share, compared with $11.75 to $12.75 per share forecast earlier.

Excluding tax gains, the company maintained its 2019 earnings targets.

The company reported an adjusted profit of $2.94 per share in the first quarter, beating analysts’ average estimate of $2.85 a share.

Shares of the company were down 3 percent at $138 in morning trading. The stock part of the Dow Jones Industrial Average was the biggest drag on the index.

Reporting by Rachit Vats, Siddhartha Cavale and Sanjana Shivdas in Bengaluru; Editing by Saumyadeb Chakrabarty