Caterpillar miss weighs on the Dow Jones; Machine demands weaken amid higher borrowing costs

Caterpillar (CAT) missed Wall Street expectations for Q3, reporting adjusted EPS of $5.17 compared to estimates of $5.34 and a revenue decline of 4.2% year-over-year to $16.11 billion, below the forecasted $16.38 billion. The earnings miss is attributed to weakening machinery demand amid high borrowing costs and inflation, which led CAT’s dealers to cut back on restocking. In response to these results and the forecast of lower sales for Q4, Caterpillar shares fell nearly 6% premarket, dragging the Dow Jones lower due to its significant weighting in the index.

The company’s guidance was revised down, with full-year revenue now expected to be “slightly lower” than prior expectations. However, Caterpillar maintained its earnings outlook, thanks to strong operating profit margins projected to be modestly higher year-over-year in Q4. Caterpillar also forecasts around $400 million in restructuring costs for the year as it adjusts to the softer demand environment.

In segment performance, Construction Industries recorded a 9% revenue decline to $6.35 billion, driven by reduced demand in North America and unfavorable pricing. Lower sales volume to end-users and changes in dealer inventory levels contributed to the segment’s decline, with segment profit decreasing by 20% due to the impact of lower sales volume and pricing pressure.

Resource Industries also struggled, with a 10% revenue drop to $3.03 billion, mainly due to reduced demand for heavy machinery. Segment profit for Resource Industries fell by 15% as end-user sales weakened, indicating ongoing challenges in this area as global commodity demand softens amid macroeconomic uncertainties.

In contrast, Energy & Transportation (E&T) saw positive momentum, with sales increasing 5% to $7.19 billion, driven by price realization and higher demand, particularly for large reciprocating engines used in data centers. Within E&T, the Power Generation sub-segment saw robust growth due to demand for large engines, while Transportation benefited from increased sales for marine applications, offsetting some weaker areas like locomotive deliveries.

The Financial Products segment posted a modest revenue increase of 6.4% year-over-year to $875 million, although operating income declined slightly, reflecting the pressure of a challenging interest rate environment. The overall operating profit margin declined to 19.5% from 20.5% last year, though Caterpillar managed to achieve an adjusted operating margin of 20.0% for the quarter.

Shares of CAT are testing the 50-sma ($370) level for support. This will be the key area for investors to watch today.

Despite the weaker results, Caterpillar generated $3.6 billion in operating cash flow for the quarter, deploying $1.5 billion toward share repurchases and dividends, reflecting management’s focus on shareholder returns amid demand headwinds. Nevertheless, the impact of rising borrowing costs and inventory adjustments has raised investor concerns about the company’s near-term growth potential, as CAT’s high exposure to cyclical industries like construction and mining is vulnerable to macroeconomic conditions.

With its stock falling in early trading, Caterpillar’s Q3 miss and cautious outlook are weighing heavily on the Dow Jones. The pullback comes as CAT’s recent momentum following a Fed rate cut in September has been tested by broader economic challenges, including elevated Treasury yields and doubts about China’s stimulus efforts, which affect global demand for heavy machinery.