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CATERPILLAR EARNINGS DOWN
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| By James B. Kelleher
Fri Jul 20, 10:22 PM ET
CHICAGO (Reuters) -
Caterpillar Inc (NYSE:CAT - news), 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 (NYSE:ETN - news), which operates in many of
the same markets as Caterpillar and still managed to beat
expectations earlier this week.
Cummins Inc (NYSE:CMI - news), 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.
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