Caterpillar alters expectations, cites weaker China demand

Yahoo Finance Live’s Julie Hyman and Brian Sozzi discuss first quarter earnings for Caterpillar.

Video transcript

JULIE HYMAN: Going to turn to one non-tech company that we are watching here this morning that's also an important one. That is Caterpillar. Caterpillar cutting its forecast. The shares are down about 2.25%. And the equipment giant blaming worse than expected demand in China. Although other parts of its business, like mining and construction, did improve. If you look at earnings per share, they beat estimates. Revenue beat estimates. It was up by 14%. And Caterpillar did see big gains in its resource industry sector, includes things like mining and quarry equipment, and also in heavy construction. Sales in that area rose 30% year over year.

But it is that forecast that is causing the shares to go down. And Brian Sozzi, really the question here is, Caterpillar, I recall a couple of years ago, came out with a negative forecast and sent the whole market tanking. That's not happening anymore, because of all of the moving parts going on. But still, those comments about China have got to be putting a chill on some of the other companies that rely on it.

BRIAN SOZZI: Caterpillar earnings, Julie, always bring a smile to my face. Because it makes me remember the Caterpillar work boots I got from Sears as a kid. But that's a discussion for a different day, many, many years ago. But look, I didn't like this quarter from Caterpillar. And I remember the quarter you were talking about a couple of years ago, Julie.

The CFO came on the earnings call, said something bad about demand, tanked the entire market and, of course, Caterpillar shares. But the market should pay careful attention to this quarter. Because I know we just highlighted sales growth in each segment. That was good. Operating profits grew much slower than sales growth in every business segment.

So when you see something like that, you have to wonder, is there margin pressure in the business? And the answer to that question I'm going to answer it for you right now. Yeah, there is. Because there's a lot of inflation impacting heavy equipment makers, like a Caterpillar. So that's one red flag.

Another would be Asia-Pacific sales in that construction industries business. For Caterpillar that is, of course, dump trucks and various other machines it uses, it produces to help companies or people move dirt. Those sales in Asia-Pacific down 21%. And Caterpillar is highlighting the impact of COVID-related lockdowns on its business in China.

Of course, that has been a theme so far in industrial earnings. And it will continue to be a theme in industrial earnings and other earnings in the weeks ahead.

JULIE HYMAN: Yeah, definitely so. And I think margins definitely are important here, Soz. I think that the demand question for me is a more acute one. Because we know that margins are in danger of being squeezed everywhere if companies don't have pricing pressure, because of what's going on with inflation. If demand is now deteriorating, that would be sort of a new element, right? Because that's something that has pretty much held up.

So I think we have to pay really close attention to what's going on there in China, even as maybe it's a temporary situation in China, because the lockdowns. But I think we have to pay close attention to that.

BRIAN SOZZI: This is just another, I'll add quickly, it's another quarter from a big company, Julie, that really reaffirms the notion that Fed chief Jerome Powell needs to get moving quicker on interest rate hikes to bring these levels of inflation down around the world.

JULIE HYMAN: Yeah, I guess, yeah. That seems to be the consensus here.