By Deborah Mary Sophia
(Reuters) -Caterpillar on Thursday warned of a sales drop in the current quarter as volumes take a hit from dealers tightening equipment inventories, sparking worries that a months-long boom in machinery demand may be coming to an end.
Shares of the global economy bellwether slumped 7% in morning trade as it said end-user sales of its machines was weaker than planned. The stock had gained about 23% for the year so far as of Wednesday’s close and hit a record high earlier in April.
Caterpillar (NYSE:) reported weak construction equipment sales in all regions except North America, where construction demand is expected to stay healthy for the rest of the year thanks to the U.S. government’s $1 trillion infrastructure law.
Still, that was not enough to offset a slump in demand in Europe and prolonged weakness in China, where economic uncertainties have weakened construction activity, prompting a cutback in production of certain machines.
“We’ve been pretty disciplined about making sure that we have cut production like, for example, in excavators … where we do see softness in the market,” Caterpillar CFO Andrew Bonfield said.
Sales at Caterpillar’s construction equipment business, which makes its ubiquitous yellow excavators, fell 5% in the first quarter, while its segment that caters to natural resources industries reported a sales decline of 7%.
“I do think we have to kind of re-evaluate and think through what execution would look like. (Machines sales) came in a bit weaker and that doesn’t give me great confidence as we head through the year … we definitely are walking away with more questions,” M Science senior analyst Alex Prudhomme said.
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The Texas-based company forecast roughly flat sales for the year.
Still, Caterpillar is banking on higher prices and flattening manufacturing costs to pad margins in the second quarter. Its first-quarter adjusted profit of $5.60 per share surpassed estimates of $5.14, according to LSEG data.
DEALER INVENTORY CONCERNS GROW
Coming off of a strong 2023 where supply chain concerns and soaring demand prompted dealers to bulk up on heavy equipment, U.S. machinery makers are now seeing a moderation in product stocking at dealers, forcing them to tighten their inventories.
Caterpillar said dealer inventories for machines grew a higher-than-expected $1.1 billion in the quarter due to sales to end-users being “modestly lower” than it had anticipated.
Its order backlog increased just $400 million on a sequential basis, but executives said they were confident that end-market demand would be stable this year.
“Dealer inventory is comfortably within what we consider a typical range, so we are not concerned about it,” CEO Jim Umpleby told analysts on a post-earnings call.
Still, with investors zeroing in on dealer inventories, Caterpillar’s results dragged shares of its rivals Deere (NYSE:) and CNH Industrial (NYSE:) down more than 1% on Thursday.
For the first quarter ended March 31, Caterpillar’s revenue fell slightly to $15.80 billion, missing estimates of $16.04 billion.