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Caterpillar is one of the world’s largest manufacturers of construction equipment and heavy machinery. It is also viewed as the leading bellwether for the U.S. manufacturing industry. In other words, what impacts Caterpillar — economic forces, trade disputes, geopolitical concerns, among others — will reverberate across the broader U.S. manufacturing industry, and oftentimes, the rest of corporate America.

On Monday morning, Caterpillar released its earnings results for the October-December fourth quarter. Its stock price summarily fell $12.49, closing down more than 9 percent. So, we ask — within Caterpillar’s fourth-quarter earnings, what was good, what was bad and what exactly triggered the massive 9 percent sell-off?

Despite the negative reception, there were some positives. Fourth quarter sales and revenues were reported at $14.3 billion, up 11 percent from the fourth quarter of 2017. For 2018, sales and revenues grew by 20 percent over the prior year to $54.7 billion. Caterpillar’s operating profits (revenues minus expenses) were $1.883 billion, a 36 percent gain from the fourth quarter of 2017.

But Caterpillar’s earnings were well below the market’s expectations. Its fourth-quarter adjusted profit per share of $2.55 missed the $2.98 the market had projected. In fact, this was Caterpillar’s largest earnings miss in 10 years. Profit per share — a company’s profits divided by its number of outstanding shares of common stock — is a key metric in quantifying a company’s performance relative to the price of its stock.

Caterpillar’s forward guidance also raised serious red flags. For 2019, it projects annual adjusted profit per share between $11.75-$12.75 compared to the market’s outlook of $12.64. Caterpillar also projects just a modest increase in sales for 2019.

There are a number of factors driving Caterpillar’s reduced profitability. Higher freight costs, rising interest rates and U.S. tariffs on imported steel and aluminum have increased Caterpillar’s operating and manufacturing costs. In 2018, tariffs added more than $100 million in additional costs. This year, the impact from tariffs should increase to $200 million.

But the key driver is a sudden weakness in its construction industries segment caused by the slowdown in the global economy, specifically China. In the fourth quarter, construction industries reported sales of $5.705 billion, a modest 8 percent increase from the fourth quarter of 2017. Though sales in North America and Europe remained strong, sales declined by 5 percent in Latin America, and more importantly, by 4 percent in Asia.

Twenty-five percent of Caterpillar’s revenues are derived from the Asia Pacific region. The region’s biggest force, China, is the world’s second largest economy and is America’s largest trading partner. But in 2018, China’s economy reached a 28-year low — a fact that significantly impacts Caterpillar. China accounts for, on average, 5-10 percent of Caterpillar’s total sales and revenues and 10-15 percent of sales and revenues for its construction industries segment.

Weaker sales, combined with higher costs, resulted in fourth-quarter profit growth of just 1 percent for construction industries. Caterpillar’s other two core segments, resource industries (mining) and energy and transportation, reported fourth-quarter profit growth of 90 percent and 23 percent, respectively.

For 2019, Caterpillar’s construction industries segment will likely face similar hurdles to its sales and profits growth. Global economic growth is expected to remain soft. Demand in China, a critical marketplace, is expected to be flat amid a further weakening Chinese economy. In Latin America, sales are expected to remain low.

Despite its fourth-quarter earnings setback, this is not a doom-and-gloom outlook for Caterpillar. Remember, going into the fourth quarter, it had posted three consecutive quarters of record profit per share driven by a strong global and domestic demand for its goods and services. Yes, it faces obstacles in higher costs, a weakening Chinese economy and global trade disputes that have placed it in the crosshairs of our trading adversaries. But all things considered, for Caterpillar, 2018 wasn’t that bad of a year.

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Mark Grywacheski spent more than 14 years as a professional trader in Chicago, where he served on various committees for multiple global financial exchanges and as an industry Arbitrator for more than a decade. He is an expert in financial markets and economic analysis and is an investment advisor with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment advisor with the U.S. Securities Exchange Commission.