January 31, 2020 / 11:52 AM / 16 days ago

Caterpillar's earnings add to industrial gloom

(Reuters) - Caterpillar Inc (CAT.N) on Friday forecast worse-than-expected earnings for this year after reporting lower sales across all three primary segments in the last quarter, offering further evidence of strains in the U.S. industrial economy.

The world’s biggest construction and mining equipment maker said it expects adjusted profit in 2020 in the range of $8.50 to $10 per share on the back of a further decline in equipment sales. The forecast is lower than $11.06 per share last year and below the average analyst estimate of $10.63 per share.

The Deerfield, Illinois-based company, considered a bellwether for economic activity, has been buffeted by the prolonged U.S.-China trade war that has made its customers wary of committing to large capital expenditures, hitting its sales and forcing production cuts.

With customers hesitant to spend on new equipment, it expects as much as a $1.5-billion reduction in dealer inventories this year.

Its shares were last down about 1.6% at $133.15, weighing on the Dow Jones Industrial Average .DJI.

Caterpillar’s earnings comes a day after the world’s largest package delivery company, United Parcel Service Inc (UPS.N), forecast 2020 profit below estimates, citing global trade weakness and a slump in domestic industrial production.

The tit-for-tat tariff war between the world’s two largest economies dragged down global growth last year to the lowest level since the global financial crisis. In the United States, it drove the manufacturing economy into a recession.

The heavy equipment maker said retail demand for construction machines has softened in North America - its biggest market. It expects spending on both residential and non-residential construction to decline this year. Mining equipment sales, however, are projected to see a gradual recovery.

Sales in China were up in the quarter through December and are estimated to be flat to down 5% in 2020. But the outbreak of coronavirus could change those estimates.

The world’s second-largest economy accounts for up to 10% of Caterpillar’s sales. Chief Financial Officer Andrew Bonfield told Reuters that while none of the company’s manufacturing facilities is in the worst-affected province, the outbreak has delayed the reopening of many of its facilities after the Chinese New Year by a week.

He said the company is monitoring the “very fluid” situation.

To dampen the impact of economic swings, Caterpillar is focusing on shortening lead times and boosting the share of its more profitable and less cyclical services and parts business in overall revenues.

It is also trying to keep a lid on costs. That helped improve operating profit margin in the last quarter despite lower sales.

Slideshow (5 Images)

The company spent $6.2 billion on share buybacks and dividends last year. In contrast, capital expenditure was just $1.1 billion, which is forecast to rise to $1.2 billion this year.

At the end of 2019, it had a cash balance of $8.3 billion.

Lower tax rates helped the company post quarterly adjusted profit of $2.63 per share, higher than Wall Street’s estimates and above $2.55 per share last year.

Reporting by Rajesh Kumar Singh in Chicago and Rachit Vats in Bengaluru; Editing by Chizu Nomiyama and Nick Zieminski

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