October 25, 2016 8:55 AM, EDT

Caterpillar Lowers Sales Forecast as Rebound Proves Elusive

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Caterpillar Inc., the biggest maker of construction and mining equipment, cut its 2016 revenue forecast and said next year won’t be much different as companies defer purchases amid sluggish growth and low commodity prices. Shares fell.

Sales this year will be about $39 billion, the Peoria, Illinois-based company said in an Oct. 25 statement, compared with previous guidance of $40 billion to $40.5 billion and the $40.1 billion average of 15 analysts’ estimates tracked by Bloomberg News. Caterpillar hasn’t posted an annual sales gain since 2012.

“While we are seeing early signals of improvement in some areas, we continue to face a number of challenges,” Doug Oberhelman said in what is his last quarterly earnings report before retiring as CEO. “We remain cautious as we look ahead to 2017, but are hopeful as the year unfolds we will begin to see more positive momentum.”

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Oberhelman is handing over the reins to Jim Umpleby as a rebound in prices for commodities is yet to translate into resurgent demand for engines, giant trucks and shovels. Miners and energy customers have been cutting costs to buttress profit after raw materials from crude to zinc slid last year. Caterpillar’s global retail sales of machines slumped 18% in the three months through September from a year earlier, with only the Asia-Pacific region growing, the company said Oct 24.

Oberhelman didn’t offer sales and earnings forecasts for 2017.

Caterpillar expects prices of most mined commodities “to be flat to up modestly” next year and is seeing some improvement in dealer rebuild activity, while its market position continues to improve in China. Construction sales in Brazil and Russia probably have bottomed at “very low levels” in 2016, it said.

Still, construction equipment sales in North America during the second half of 2016 are now anticipated to be lower than previously thought, with risks that may continue into 2017. Uncertainty remains in Europe, particularly around the impact of Brexit on European economic growth, business confidence and investment, it said.

Restructuring costs in 2016, which were expected to be about $700 million, are now forecast to be about $800 million mainly because of asset writedowns booked in the third quarter.

“Things will remain soft and therefore they lowered volume outlook and profitability outlook,” said Eli Lustgarten, a senior vice president at Longbow Securities. “It’s consistent with the kind of environment unfortunately we see out there, and begins to underscore why the management succession is taking place now.”

The sluggishness in sales suggests Umpleby will have his work cut out for him. After taking the helm in July 2010, Oberhelman poured almost $20 billion into research and development, capital spending and deals over a couple of years, only to see emerging markets slow and commodity prices fall.

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Since then, he’s reorganized mining and energy segments, shutting down dozens of factories and eliminating thousands of jobs. A years-long initiative to streamline the company’s supply and distribution network has yielded results as its gross margin has climbed annually since 2013, even as revenue slumped.

Third-quarter profit excluding restructuring costs was 85 cents a share, beating the 76-cent average of 18 estimates compiled by Bloomberg. Sales declined to $9.16 from $11 billion a year earlier.

“At some point, and I think we’re getting closer to that point, our business will turn up,” Oberhelman said. “It’s a good time for Jim to take over, as I know Caterpillar will deliver even better financial results when key industries begin to improve and get back to mid-cycle replacement demand levels.”