Caterpillar slashes profit forecast amid infrastructure uncertainty, weak global demand

Dive Brief:

Heavy equipment manufacturing giant Caterpillar, Inc., grappling with decreased demand in its construction and other businesses, announced a $2.5 billion decrease in third-quarter sales from the same quarter 2014, lowered its 2015 earnings forecast, and predicted sales would fall in 2016.
Caterpillar’s total sales fell 19% in the third quarter, and, citing a nosedive in construction activity in China, Brazil and Russia, the company announced a 22% drop in its construction division’s operating profit, The Wall Street Journal reported.
The company expects its construction sales to be anywhere from flat to 5% down in 2016, with U.S. construction activity negatively impacted by low infrastructure investment.

Dive Insight:

In September, Caterpillar announced significant cost reductions and company restructuring — which it expects to result in $1.5 billion in savings when fully in place — including consolidating and closing several facilities over the next two years and cutting as many as 10,000 positions by 2018.

Caterpillar CEO Doug Oberhelman told analysts he predicted Congress would soon pass a multiyear highway-funding bill, which would increase demand for construction equipment.

In July, Congress granted a three-month transportation funding extension for the Highway Trust fund, which expires on Oct. 29. Both the Senate and House are working on six-year bills, but they only have reliable funding for three years. It is unlikely Congress will pass a long-term solution before the Oct. 29 deadline, making yet another short-term extension the likely outcome.

However, despite the grim predictions for next year, shares of Caterpillar stock rose upon the news, as some analysts had predicted an even worse 2016 than the company is expecting.

"Managing through cyclicality," Oberhelman told analysts, "has been critical to Caterpillar’s success for the past 90 years. It’s nothing new for us or our customers. When world growth improves, the key industries we serve — construction, mining, energy and rail — will be needed to support that growth. We’re confident in the long-term success of the industries we’re in, and together with our customers, we’ll weather today’s challenging market conditions."

If sales and revenue do fall again in 2016, as predicted, it would be the first time the 90-year-old company has seen a four-year streak of decreases.