Caterpillar profit plunges - Net falls 21% despite strong offshore sales
Caterpillar profit plunges - Net falls 21% despite strong offshore sales
By James P. Miller
Copyright © 2007, Chicago Tribune
July 21, 2007
Caterpillar Inc., in a performance that fell significantly short of analysts' expectations, reported Friday that production difficulties and weaker sales in key U.S. end markets caused second-quarter earnings to drop more than 21 percent.
The profit shortfall at the Peoria-based maker of heavy equipment jarred investors, and shares of Caterpillar tumbled as much as 10 percent before rallying to close at $83.20, off $3.78, or 4.3 percent, on the New York Stock Exchange. Caterpillar is one of the 30 components in the Dow Jones industrial average, and its drop helped pull the blue-chip index down nearly 150 points.
Caterpillar's "disappointing earnings," said Chairman and Chief Executive Jim Owens, reflect a drop in demand for truck engines, weakness in North American sales of construction equipment and supply-chain disruptions.
A number of observers suggested the lower-than-expected earnings reflect transient pressures on Caterpillar's profit margins, and are not evidence of any sag in the company's robust offshore markets. From that perspective the shortfall is a matter of imperfect execution, and thus is fixable.
"On the revenue side, no doubt it was a very solid quarter," Edward Jones analyst Matt Collins told The Associated Press, "but if you can't manage costs and get the strong results to flow through to the bottom line, investors will get concerned."
Analysts had been expecting per-share earnings of $1.48 or $1.49, down a few cents from the year-ago quarter's record profit. But Caterpillar shocked investors with the news that net income was just $823 million, or $1.24 a diluted share, a much bigger-than-expected drop from $1.05 billion, or $1.52 a share, in the second quarter of 2006. The downturn came even though Caterpillar's sales rose by a solid 7 percent, to $11.36 billion.
Experts had been anticipating soft demand for Caterpillar's truck engines, and the big swoon in the U.S. housing market had been forecast to cut into the company's sales of construction equipment. But booming sales to still-strong offshore markets had been expected to offset those transient domestic challenges.
That's how things played out in terms of sales, but Caterpillar's profit margins came under unexpectedly heavy pressure because of operational inefficiencies associated with the extremely high production rates it has maintained in recent years.
Those difficulties, which are sometimes traceable to bottlenecks caused by a shortage of tires or other crucial components that Caterpillar obtains from its capacity-constrained suppliers, have plagued the company periodically since its global markets began to surge about three years ago.
"Caterpillar's wounds in the second quarter were largely self-inflicted," said Merrill Lynch analyst Andrew Obin, noting that the company "continues to struggle with internal capacity constraints and supply-chain inefficiencies."
Caterpillar is in the fourth year of a positive industry cycle that frequently lasts about seven years. Historically the company has added capacity to meet demand at cyclical peaks. That maneuver maximizes profits during good times but creates higher fixed costs that serve as a drag on earnings when demand inevitably subsides.
Owens, in a break with tradition, has tried to avoid building large amounts of new capacity during the current surge in demand, and instead is attempting to make existing operations more efficient.
In large part that effort appears to be working, and promises to help Caterpillar's future earnings. But periodically, as in the latest quarter, his gamble has generated downside profit surprises.
Profit margins at both the company's diesel-engine segment and its flagship heavy-machinery group were narrower than expected, JPMorgan analyst Stephen Volkmann told investors, "as core operating costs remained stubbornly high."
Despite the underperformance Caterpillar reaffirmed its earlier full-year profit guidance, saying it expects earnings in a range of $5.30 to $5.80 a share, up from the previous year's $5.17 a share.
Despite the profit decline caused by "operating inefficiencies and higher raw-material costs," Morningstar analyst John Kearney told investors, "we are maintaining our fair value estimate as the firm remains on track to meet our full-year operating forecasts."
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jpmiller@tribune.com
By James P. Miller
Copyright © 2007, Chicago Tribune
July 21, 2007
Caterpillar Inc., in a performance that fell significantly short of analysts' expectations, reported Friday that production difficulties and weaker sales in key U.S. end markets caused second-quarter earnings to drop more than 21 percent.
The profit shortfall at the Peoria-based maker of heavy equipment jarred investors, and shares of Caterpillar tumbled as much as 10 percent before rallying to close at $83.20, off $3.78, or 4.3 percent, on the New York Stock Exchange. Caterpillar is one of the 30 components in the Dow Jones industrial average, and its drop helped pull the blue-chip index down nearly 150 points.
Caterpillar's "disappointing earnings," said Chairman and Chief Executive Jim Owens, reflect a drop in demand for truck engines, weakness in North American sales of construction equipment and supply-chain disruptions.
A number of observers suggested the lower-than-expected earnings reflect transient pressures on Caterpillar's profit margins, and are not evidence of any sag in the company's robust offshore markets. From that perspective the shortfall is a matter of imperfect execution, and thus is fixable.
"On the revenue side, no doubt it was a very solid quarter," Edward Jones analyst Matt Collins told The Associated Press, "but if you can't manage costs and get the strong results to flow through to the bottom line, investors will get concerned."
Analysts had been expecting per-share earnings of $1.48 or $1.49, down a few cents from the year-ago quarter's record profit. But Caterpillar shocked investors with the news that net income was just $823 million, or $1.24 a diluted share, a much bigger-than-expected drop from $1.05 billion, or $1.52 a share, in the second quarter of 2006. The downturn came even though Caterpillar's sales rose by a solid 7 percent, to $11.36 billion.
Experts had been anticipating soft demand for Caterpillar's truck engines, and the big swoon in the U.S. housing market had been forecast to cut into the company's sales of construction equipment. But booming sales to still-strong offshore markets had been expected to offset those transient domestic challenges.
That's how things played out in terms of sales, but Caterpillar's profit margins came under unexpectedly heavy pressure because of operational inefficiencies associated with the extremely high production rates it has maintained in recent years.
Those difficulties, which are sometimes traceable to bottlenecks caused by a shortage of tires or other crucial components that Caterpillar obtains from its capacity-constrained suppliers, have plagued the company periodically since its global markets began to surge about three years ago.
"Caterpillar's wounds in the second quarter were largely self-inflicted," said Merrill Lynch analyst Andrew Obin, noting that the company "continues to struggle with internal capacity constraints and supply-chain inefficiencies."
Caterpillar is in the fourth year of a positive industry cycle that frequently lasts about seven years. Historically the company has added capacity to meet demand at cyclical peaks. That maneuver maximizes profits during good times but creates higher fixed costs that serve as a drag on earnings when demand inevitably subsides.
Owens, in a break with tradition, has tried to avoid building large amounts of new capacity during the current surge in demand, and instead is attempting to make existing operations more efficient.
In large part that effort appears to be working, and promises to help Caterpillar's future earnings. But periodically, as in the latest quarter, his gamble has generated downside profit surprises.
Profit margins at both the company's diesel-engine segment and its flagship heavy-machinery group were narrower than expected, JPMorgan analyst Stephen Volkmann told investors, "as core operating costs remained stubbornly high."
Despite the underperformance Caterpillar reaffirmed its earlier full-year profit guidance, saying it expects earnings in a range of $5.30 to $5.80 a share, up from the previous year's $5.17 a share.
Despite the profit decline caused by "operating inefficiencies and higher raw-material costs," Morningstar analyst John Kearney told investors, "we are maintaining our fair value estimate as the firm remains on track to meet our full-year operating forecasts."
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jpmiller@tribune.com
posted by Carlos T Mock at 7:30 AM
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