Industrial equipment giant Caterpillar is being hit by a slowdown which is impacting the confidence of investors.
The fourth-quarter earnings of Caterpillar missed out on the estimates of Wall Street. There was a drop of 4 per cent in sale in its Asia/Pacific business compared to a year ago primarily because of “lower demand in China”, the company said. According to research firm Bespoke Investment Group, this was the largest earnings miss of Caterpillar in the last 10 years.
The US equipment giant also issued a lower than expected earnings outlook for 2019.
The results did not make investors in the company happy and it lost more than 8 per cent on its share value along with an impact on the broader market as well. While already jittery with a number of uncertainties surrounding eco-political developments including a crucial vote on Brexit and the US-China trade talks, the Futures fell further after the earnings report by Caterpillar, which is also component of the Dow Jones.
There was further turmoil in the market after US chip maker Nvidia also issued a sale warning which is lower than what the markets were expecting citing expected lower demand in China.
The company was now predicting “a modest sales increase” for this year, partly due to the “macroeconomic and geopolitical environment”, said Caterpillar chairman and CEO Jim Umpleby while announcing the earnings report.
Caterpillar is vulnerable to a slowdown or weakness in China. This is because over the last few years, a huge amount of money has been spent in infrastructure by China and as a result had purchased a large number of bulldozers, excavators and tractors from Caterpillar.
Caterpillar Chief Financial Officer Andrew Bonfield had informed during the company’s last earnings conference call in October that in the last few years, anything between 5 per cent and 10 per cent of the total sales of the company was accounted for by China while accounting for between 10 per cent and 15 per cent of the revenues generated from its construction unit.
In recent months there has been a slowdown in the Chinese economy and those companies that have large exposure to the Chinese economy are being impacted.
There would be weaker iPhone sale in China, Apple has already warned. The lower demand in China was also impacting profits of tire maker Goodyear and FedEx, the companies have said.
Caterpillar has also been impacted by the uncertainty surrounding the trade talks between the United States and China. The company said that in the third quarter, the company took a hit of $40 million because of tariffs on steel and other materials which amounted to just over $100 million for the entire year of 2018. Nothing about the tariff was however mentioned by the company during its latest earnings reporting.
However the company expects a flat year in terms of demand and sale in China for the current year on the overall after a period of two years of robust growth, said Umpleby during a conference call with analysts while announcing the results.
(Adapted from CNN.com)