Caterpillar Inc. (CAT) did not live up to expectations with its second-quarter earnings release on Wednesday and owners of its shares are paying for the weakness.
Caterpillar was down around 4% in trading before Wednesday's opening bell after reporting revenue that just edged out estimates but an earnings number that missed the mark by a wide margin. Caterpillar said earnings for the quarter came in at $2.83 per share, down from $2.97 a share in last year's second quarter and well short of the $3.11 FactSet consensus forecast.
Caterpillar cited strong currency headwinds in its EMEA sales, lower construction levels in Latin America and competitive pricing in China as key factors offsetting high demand in North America. Of course, Caterpillar is also embroiled in the Sino-American trade war that curbs performance in China specifically.
"The increase in manufacturing costs was primarily due to higher material costs, including tariffs, variable labor and burden and warranty expense," a Caterpillar 8-K filing explains. "The change in sales volume was the result of an unfavorable mix of products primarily within Energy & Transportation and Construction Industries."
By segment, lower oil and gas costs drove lower demand for reciprocating engines in the Permian Basin, while industrial and transportation sales also fell, bringing down the overall energy and transportation segment. A $126 million decrease, or 12% drop, in profits from the energy segment significantly offset an $80 million jump in resource industries profits and a $90 million leap in construction earnings.
Still, Caterpillar management largely ignored the miss in company statements and remained upbeat.
"Sales and revenues increased this quarter, including a record performance from Construction Industries, which reflected our strong competitive position globally," Caterpillar CEO Jim Umpleby said, highlighting the positives. "Our strong operating cash flow in the quarter allowed us to repurchase shares and pay dividends of about $1.9 billion. This is in line with our intention to return substantially all free cash flow to shareholders."
Management said that it will maintain its full-year earnings guidance in the range of $12.06 to $13.06 per share, but said the final tally will likely be at the lower end of that range.
"We expect our profit per share in 2019 to be another record. We have the right strategy in place to deliver long-term profitable growth through our continued focus on strategic investments, including growing services and expanding offerings," Umpleby said. "We will also continue to focus on driving operational excellence including a flexible and competitive cost structure."
Management will need to continue to reinforce the positives from the quarter and its 2019 outlook during an earnings call scheduled for 11 a.m. ET if it hopes to reverse the stock slide here on Wednesday morning.
The call will be available for broadcast here.