Caterpillar shares fall on equipment demand concerns despite earnings beat

By Bianca Flowers and Shivansh Tiwary

(Reuters) -Caterpillar reported a double-digit rise in profit on Tuesday, beating Wall Street estimates on solid construction equipment sales in North America, but its shares slid in early trading on signs of slowing machinery demand.

The Texas-based manufacturer’s shares fell as much as 6.3% as dealer inventories rose for the third-consecutive quarter at the same time Caterpillar’s order backlog shrunk, indicating that equipment demand may have peaked.

The world’s largest construction equipment maker’s order backlog fell $2.6 billion over the quarter.

“The order backlog fell … which is a good leading indicator that demand is slowing,” said Matt Britzman, equity analyst at Hargreaves Lansdown.

Executives attempted to assuage investor concerns on a conference call. Chief Financial Officer Andrew Bonfield said that dealer inventories for construction equipment are “within the typical three-to-four month sales range.”

“There are still areas and products where dealers would like to have more inventory,” Bonfield said, adding that Caterpillar is very comfortable with inventory levels.

Construction equipment demand had been resilient as the U.S. upgraded its roads, railways and other transportation infrastructure under a $1 trillion package approved by Congress in 2021 under the Biden administration.

Caterpillar’s profit has also benefited from effective cost controls and price hikes shielding margins amid ongoing inflationary pressures.

Machinery, Energy and Transportation equipment profit rose 48% from the year prior.

Executives reiterated that demand for heavy machinery from construction and mining industries was expected to drive full-year operating margin slightly above its targeted range. The company had forecast an adjusted operating profit margin between 10-13% and 18-21% when it reported fourth-quarter results on Jan. 31.

Caterpillar’s sales and revenue were up across all equipment segments, with its construction division recording the highest bump, a 12% rise.

“Third quarter was very strong results – still fairly price driven,” said Kristen Owen, executive director at Oppenheimer & Co Inc. “We knew there were going to be some volume headwinds in the back half of the year as Cat looks to bring down inventory levels.”

The company has ramped up production to make up for sales missed during the pandemic when components were unavailable but is still navigating supply chain challenges, primarily with its large engines.

Its profit rose to $2.79 billion, or $5.45 per share, outpacing an analysts’ forecast of $4.79 for the third-quarter ending Sept. 30.

The industry bellwether’s sales for the quarter through September rose 12% to $16.8 billion from $14.9 billion a year earlier.

(Reporting by Bianca Flowers in Chicago and Shivansh Tiwary in Bengaluru; Editing by Devika Syamnath, Louise Heavens, Mark Porter, Emelia Sithole-Matarise and Marguerita Choy)