Caterpillar 3Q profit drops 53 percent on weaker sales
Caterpillar is counting on overseas customers to buy more of its construction and mining equipment next year, helping move the company beyond a deep recession that slammed its third-quarter earnings.
Signs are emerging from China that demand for the company's yellow-and-black "Cat" machinery is picking up. And the Peoria, Ill., company, which generates nearly 70 percent of sales from overseas, wants its dealers prepared for a rebound in demand.
"We are seeing encouraging signs that indicate a recovery may be under way," CEO Jim Owens said after company posted earnings on Tuesday.
He cautioned that the world economy still faces significant challenges and that next year will be difficult.
Those challenges dogged the world's largest maker of construction and mining equipment over the summer. With those industries still relatively weak, global machinery sales fell by 48 percent in August, the 11th-straight month of declines. Big equipment dealers supplied customers by dipping into stockpiles rather than placing new orders.
As a result, sales languished and dragged down third-quarter profits 53 percent, despite large cuts in staff and production.
Overall sales slid 44 percent to $7.30 billion. Declines were led by Europe, Africa and the Middle East and followed by North America. Sales of machinery dropped 52 percent, engine sales slipped 35 percent and finance sales dipped 14 percent.
The quarter marked a sales "low point" in the recession, Caterpillar said.
However, Asia and the Pacific region saw sales drop the smallest amount: 26 percent. Machine deliveries in Asia's emerging markets have recovered from recession lows, with China hitting a new third-quarter high, helped by the country's economic stimulus policies.
Bill Selesky, an analyst at Argus Research, said Caterpillar's results beat his expectations, and that its forecast of higher sales seemed to indicate global markets are "picking up a little bit better than people expected."
About 67 percent of Caterpillar's revenue came from overseas in 2008, up from 63 percent in 2007 and 54 percent in 2006.
"They're being fairly bullish, and I think the bullishness applies to global markets other than the U.S.," Selesky said.
Shares of the company rose $1.71, or 3 percent, $59.56.
Caterpillar sees 2010 sales rising 10 percent to 25 percent from their midpoint of 2009, partly helped by expectations that dealers will start ordering equipment after going through stockpiles.
The company also raised the lower end of its 2009 profit forecast to $1.10 from 40 cents. But overall, Caterpillar expects earnings this year to fall within a more narrow range of $1.10 to $1.30 per share, versus the span of 40 cents to $1.50 per share it forecast earlier.
Caterpillar has struggled with lower demand since the world economy worsened late last year. Lower prices for commodities such as iron ore, a key steel ingredient, have undercut orders for its giant mining trucks. A battered housing market also has eaten into the company's sales.
The company has responded by dramatically cutting production and laying off thousands of workers. Since spotting signs of a recession last year, the company has cut 16 percent of its work force, which now stands at just above 94,000.
Analysts say renewed demand from developing countries such as China and Brazil, a weaker dollar that makes the company's products less expensive in overseas markets and rising commodity prices could brighten Caterpillar's prospects next year.
Earlier this month, the company said it planned to raise prices by up to 2 percent worldwide -- an increase considered relatively modest, but evidence of stronger projected demand in 2010.
The company earned $404 million, or 64 cents per share, in the third quarter, compared with $868 million, or $1.39 per share, a year earlier.
Caterpillar's results are considered an indicator of global economic health because of the company's broad reach and diverse line of products, including bulldozers and engines that run oil drills.