Caterpillar Tumbles, Drags Dow Lower On Huge Miss, Poor Guidance; Blames China

All eyes were on industrial bellwether Caterpillar's Q4 earnings this morning for confirmation whether the China slowdown is indeed trickling down into China-facing US companies (after China reported overnight that total industrial profits posted a second consecutive Y/Y decline in December, sliding -1.9% vs -1.8% in November), and that's precisely what CAT reported, when it announced Q4 EPS of $2.55, a huge miss to expectations of $2.99, on revenue of $14.3BN, also slightly below the $14.36BN expected.

While the numbers were not a disaster on a comparable basis, with sales up 11% from a year earlier, while adjusted EPS also rising 18% from Q4 2017, the EPS miss was the biggest since 2009 as Wall Street failed to adjusted its expectations lower for what is clearly a China slowdown story.


In its earnings slide presentation, CAT said that higher costs, a 26% tax rate and normalized level of restructuring costs are headwinds for 2019, while 2019 tailwinds include lower short-term incentive compensation expense, favorable price realization, Financial Products profit and share buyback.

Some more troubling highlights from the report via Bloomberg:

  • For 2018, the mark-to-market adjustment on pension and OPEB plans was a net loss of $495 million, primarily due to lower than expected returns on plan assets, partially offset by higher interest rates
  • During the fourth quarter of 2018, CAT recognized a $50 million increase to the estimated charge for the cost of mandatory deemed repatriation of non-U.S.
  • Dealer machine and engine inventories increased about $200 million during the fourth quarter of 2018
  • At the end of the fourth quarter of 2018, the order backlog was $16.5 billion, about $800 million lower than the third quarter of 2018

Just as troubling as the huge historical miss was the company's guidance, with the company now expecting "2019 profit to increase to a range of $11.75 to $12.75 per share", which is dangerously on the low end of Wall Street's consensus of $12.72

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