Caterpillar sees stock sell-off despite record 3Q profits; Wall Street concerned about rising costs, trade tariffs

Caterpillar Inc., which announced a multimillion-dollar expansion this summer at its North Little Rock tractor factory, issued a warning this week that U.S. trade tariffs are hurting the company’s bottom line, even after the global construction and farming equipment conglomerate reported the best third-quarter profit per share in the company’s 93-year history.

That news caused a frantic sell-off in the morning session on the New York Stock Exchange before the company’s shares settled down $9.73, or 7.56%, at $111.98. Nearly 24.1 million Caterpillar shares traded hands, more than five times the normal volume, as Dow Jones Industrials closed at 25,191.43, down 125.98 points.

In the company’s earnings call with Wall Street analysts, Caterpillar’s newly appointed CEO Jim Umpleby said highlighted concerns that operating costs from energy and material prices and trade tariffs were dragging down the industrial bellwether’s bottom line, noting that manufacturing expenses rose by $205 million in the third quarter.

“Trade costs continue to be elevated due to a variety of factors, including getting higher rates, insufficient loads and expedited freight costs as we ramp up production to increase demand,” said Umpleby. “Even though the mid-year price increase only had partial impact on the quarter, the drag of higher input costs and tariffs was $50 million more than price realization.”

The Caterpillar CEO said the company would look to operating efficiencies to reduce the impact of rising costs and trade expenses further. “We expect that this effort, plus the benefit of mid-year price increases, will further moderate the impact of material and trade costs in the fourth quarter,” he said.

Companywide, Caterpillar reported operating profit of $2.13 billion, or $2.88 per share, up 41% compared to nearly $1.51 billion, or $1.77 per share, in the same period of 2017. Third-quarter 2018 sales and revenues rose to $13.5 billion, up 18% compared with $11.4 billion in the third quarter of 2017.

Excluding restructuring costs and a net tax benefit to adjust deferred tax balances, adjusted profit per share in the third quarter of 2018 was $2.86, compared with third-quarter 2017 adjusted profit per share of $1.95. Wall Street had expected the Chicago are industrial conglomerate to report third quarter profits of $2.85 per share on revenue of $13.29 billion, according to Thomson Reuters.

ADDS 250 JOBS IN ARKANSAS
“This was the best third-quarter profit per share in our company’s history,” said Umpleby who took over the chief executive’s role on Sept. 1. “Our global team continues to do excellent work focusing on our customers’ success and executing our strategy for profitable growth.”

Entering the fourth quarter, Caterpillar adjusted its profit per share outlook from $10.65 to $11.65 to a wider range of $11 to $12 per share. The current yearly profit forecast now includes a net tax benefit of $95 million that was recorded in the third quarter of 2018 to adjust deferred tax balances, officials said. The forecast, however, excludes restructuring costs of about $400 million, higher trade and tariff costs, rising pension expenses, and unseen provisions from the 2017 corporate tax cut.

Despite the midday trading swoon in today’s session, Caterpillar’s shares were able to recover some early losses after top company executives conferred with Wall Street analysts and investors. One of the company’s key highlights was that sales and production volumes are expected to continue rising in the fourth quarter and early 2019. That sales growth led to an 8,200 worker increase in the company’s 123,100-person global in the third quarter, officials said.

Part of that job growth was due to the company’s announcement on July 5 that it would invest $40 million at the company’s North Little Rock plant and add more than 250 jobs as part of an expansion to make giant yellow motor graders that are familiar at construction sites worldwide. Caterpillar first opened the plant in 2010, and in late 2017 added the production of medium wheel loaders to the manufacturing line.

According to company officials, the multimillion-dollar investment includes work between 2017 and 2020, when the lines to produce paving equipment – a large six-wheeled rotary mixer, for example – is expected to be complete. An estimated 525 people now work at the sprawling North Little Rock plant located near the banks of the Arkansas River.