Caterpillar Stock Fell After Disappointing Q2 Earnings

On Wednesday, Caterpillar (CAT) reported its second-quarter earnings before the markets opened. The company’s top-line and bottom-line results missed market expectations. Caterpillar’s revenues of $14.4 billion missed analysts’ estimate by $40 million. The company’s EPS of $2.83 was lower than analysts’ estimate of $3.12. The EPS fell 4.7% YoY (year-over-year), which wasn’t expected.

Caterpillar attributed the lower earnings to higher manufacturing costs. The higher costs were due to “higher material costs, variable labor and burden and warranty expense.” Weaker demand for construction machines in Asia-Pacific and soft sales in the company’s energy and transportation division back home were largely responsible for the disappointing earnings.

Caterpillar reiterated its guidance for an EPS of $12.06–$13.06 for 2019. However, the company expects the earnings to be at the lower end of the range.

Segment-wise performance

For the Construction Industries segment, the sales increased 5% YoY. The sales in Asia-Pacific fell 22% YoY. According to the press release, the lower sales were mainly due to China. The lower demand was “driven by continued competitive pricing pressures and timing of the selling season as well as unfavorable currency impacts.”

In the Resource Industries segment, the sales increased 11% YoY. The segment was strong due to higher equipment demand and favorable price realization. Caterpillar attributed the improvements to increased capital spending from mining customers.

For the Energy & Transportation segment, the sales fell 4% YoY. Caterpillar’s margins in the segment fell 16.2% in the second quarter compared to 17.7% in the second quarter of 2018. The oil and gas sales fell 11% YoY. Caterpillar attributed the decline to “the timing of turbine project deliveries that occurred in the second quarter of 2018 and from lower demand for new equipment in the Permian Basin.”

Caterpillar stock fell

Due to lower-than-expected earnings and a weaker guidance outlook, Caterpillar stock fell 4.5% at 10:00 AM ET on Wednesday.

Boeing (BA) also reported its earnings on Wednesday. The company’s earnings missed market expectations. Boeing reported a record loss of $2.9 billion in the second quarter. A large part of the company’s fleet is still grounded. Boeing stock fell 1.06% as of 10:00 AM ET on Wednesday.

Caterpillar and Boeing act as market bellwethers. Weakness in the two stocks is weighing on the broader stock markets. Both of the stocks are part of the Dow. At 10:00 AM ET on Wednesday, the Dow Jones Industrial Average Index (DIA) was trading down by 0.30%.

Trade bellwether

Caterpillar stock is seen as trade bellwether. Analysts look at the stock for cues about the overall direction of the trade tensions between the US and China. Due to more tension between the two countries, Caterpillar stock has been an underperformer this year. Year-to-date, the stock has risen 8.7% as of July 23—compared to a rise of 17.2% in DIA during the same period.