The steep drop in oil prices will help cut Caterpillar’s earnings by more than 20 per cent this year, the world’s largest maker of heavy equipment warned on Tuesday, as a prolonged mining slowdown and weak global economic growth continue to plague its profits.
The forecast, coupled with a 25 per cent drop in fourth-quarter earnings, sent Caterpillar’s shares down more than 7 per cent at $79.85 by the close of New York trading.
The company said lower oil prices would hit its construction segment and its energy and transportation business, which provide equipment, engines and turbines for drilling and well services in oil producing regions. If 2015 sales fall as forecast, it would be the first time since the Great Depression that Caterpillar has experienced three consecutive years of falling revenues.
“The recent dramatic decline in the price of oil is the most significant reason for the year-over-year decline in our sales and revenues outlook,” said Doug Oberhelman, chief executive.
The slide in crude prices could cause oil companies to slash capital spending by 20 per cent, or $28bn, by 2017 from last year, Morgan Stanley analysts estimate.
Caterpillar said it expected world economic growth to “only improve modestly in 2015”, with continued weakness in copper, coal and iron ore prices further hitting its struggling mining business.
Mr Oberhelman said the strong US dollar, which he expected to continue rising, would hurt US manufacturers, though Caterpillar’s global production footprint would help offset the impact.
The group now expects 2015 earnings of $4.75 a share, excluding restructuring costs, far below Wall Street’s $6.67 consensus forecast. The company lowered its 2015 sales forecast to $50bn, down about 10 per cent from 2014.
The Illinois-based company has slashed thousands of jobs and slowed production in response to a slowdown in spending by mining companies, which has cut into sales for about two years.
Weakness in mining and construction sales were partially offset in the fourth quarter by strength in Caterpillar’s energy and transport equipment division. Sales in that segment rose 11 per cent, to $6.2bn, while construction equipment sales slipped 9 per cent to $4.4bn and mining equipment sales fell 10 per cent to $2.4bn.
On Monday, the company reported that retail machine sales had fallen 12 per cent in the three months to December, driven by weakness in mining, which fell 22 per cent. Sales to the construction industry fell 9 per cent, but rose 5 per cent in North America, in a sign of the nascent US housing recovery.
Fourth-quarter earnings fell from $1bn, or $1.54 a share, to $757m, or $1.23 a share. Sales for the three months to December were down 1 per cent to $14.2bn.
Excluding restructuring costs, the company reported earnings of $1.35 a share. Analysts had expected earnings of $1.55 a share on $14.18bn in revenues.