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Oct. 22, 2019, 8:01 a.m. EDT

Caterpillar earnings: Expect weakness on China tensions and global economic slowdown

Stock hit by a Morgan Stanley downgrade on Friday as core business faces growing headwinds

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By Ciara Linnane, MarketWatch


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Caterpillar’s earnings come at a glum time for manufacturing

Caterpillar Inc. is scheduled to report third-quarter earnings on Wednesday, and expectations are subdued as trade tensions with China persist and global economies show signs of slowing.

The Deerfield, Ill.-based maker of bulldozers, excavators and other equipment for the construction and mining industries said in July it expects its full-year profit to come in at the low end of its range, and forecast modest sales growth, citing lower sales in China and higher tariff and labor costs.

Caterpillar /zigman2/quotes/203434128/composite CAT -0.58%  is heavily exposed to China, which is undergoing a period of slowing growth. The Chinese economy grew 6% in the third quarter to land right on the central government’s full-year baseline target for gross domestic product, as business activity continues to deteriorate in the world’s No. 2 economy, as The Wall Street Journal reported.

The first batch of earnings from major industrial companies this week reflected the weakening macroeconomic conditions and continued fallout from tariffs, with economic data already showing signs of a manufacturing slowdown.

Don’t miss: China casts a long shadow over stocks as earnings season opens this week

Caterpillar’s machine sales in Asia fell 8% in the second quarter due to competitive pricing pressure. But revenue in the U.S. and Canada grew 11%, buoyed by strong demand for mining and construction equipment.

As always, Caterpillar’s earnings will be viewed as a broader barometer of the state of the world economy given its roster of international clients in the industrial sector.

See also: The global center of trade and capital is rapidly shifting to Asia

Morgan Stanley downgraded the stock to equal weight from overweight on Friday, where analyst Courtney Yakavonis had rated the stock since March of 2019. The analyst cut her stock price target to $145 from $150 and said she sees growing risks to the company’s core construction and energy and transportation segments.

See: IMF’s new leader says U.S.-China deal is not enough to spur global growth

“Resources segment and share repurchases continue to support EPS, but are unable to fully offset these headwinds,” the analyst wrote in a note to clients. She said she expects negative EPS growth in 2020.

Don’t miss: Slowdown fears, trade wars hit sales at major industrial companies

Here’s what to expect from Caterpillar earnings:

Profit: Caterpillar is expected to post per-share earnings of $2.90, according to analysts polled by FactSet, up from $2.86 a year ago.

Estimize, which crowdsources earnings estimates from buy and sell-side analysts, academics, executives, investors and others, is expecting earnings of $2.86 a share.

/zigman2/quotes/203434128/composite
US : U.S.: NYSE
$ 145.49
-0.85 -0.58%
Volume: 1.06M
Nov. 13, 2019 12:00p
P/E Ratio
13.84
Dividend Yield
2.83%
Market Cap
$81.79 billion
Rev. per Employee
$526,173
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