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Market Update

Stocks in the News: Caterpillar

Caterpillar suffers from sluggish sales, but still has an engine or two running.

Caterpillar (CAT) remains in disrepair. Orders for its construction machinery have yet to recover even though commodity prices, which drive demand for its equipment, have regained strength.

Caterpillar shares fell 6 ¾ to 49 3/16.

The company warned fourth-quarter earnings would be only a bit above $0.61, substantially beneath Wall Street's consensus of $0.97. It also said this year's sales will be 5% below last year's. The industry already has easy earnings comparisons; last year's demand for heavy machinery used in extracting commodities was dampened by lower commodity prices.

The good news is half of the company's sales are from overseas, where an economic recovery is under way and Caterpillar has dominant market share. Machinery sales outside of North America rose 14.7% in the third quarter from a year ago. Caterpillar has also idled some plants and cut labor to reduce costs.  

The bad news is that while commodity prices have recovered, leading producers have yet to increase output. Unfortunately, Caterpillar had counted on an increase to boost its own output of machines, and an inventory backlog now exists with dealers. Reducing this inventory will hurt earnings in the short term because of lower prices, but could clear the way for higher profits down the road.