Dow-30 component and heavy equipment manufacturer Caterpillar (CAT - Free Caterpillar Stock Report) has reported third-quarter results. The top-line tally of $16.44 billion marked a 5% advance from the prior-year figure, but fell below our $17.15 billion estimate, despite a material improvement in operations. While the North American market showed strength, with year-over-year sales up 9%, demand moderated in parts of Asia, Europe, and Latin America. This proved especially detrimental to the company's Power Systems and Construction Industries segments. In particular, the former experienced a slowdown in orders for industrial power applications. Meanwhile, slowing economic growth and cooling commodity prices resulted in canceled orders within the Resource Industries division.

At the same time, earnings came in at $2.26 a share in the September period, a 17% increase from the comparable 2011 figure. Although share net was a nickel short of our estimate, it was slightly above Wall Street consensus, with Caterpillar stock trading nominally higher on the news.

Several factors, including stalling economic growth in the U.S. and China, as well as recessionary concerns in parts of the euro zone, suggest operating conditions will be more challenging in the quarters ahead. To make matters worse, efforts by the Chinese government to rein in that country's property markets and inflation have led to a material slowdown in China's gross domestic product (GDP). The People's Republic reported GDP growth of 7.4% during the third quarter, the seventh-consecutive quarterly decline and well below the 10% average realized during the last three decades. Caterpillar, which has thrived in this market in recent years, declared that it had overestimated Chinese demand for construction equipment.

What's more, stalling investment efforts in the developing world have served as a warning. In recent months, two of the world's largest mining companies (and Caterpillar's bigger customers), BHP Billiton Ltd. (BHP) and Rio Tinto Group (RIO), deferred or delayed projects worth between $75 billion and $100 billion.

In fact, Caterpillar is positioned to close 2012 on a relatively quiet note. It is now looking for sales to approximate $66 billion, with a share-net tally between $9.00 and $9.25, down from its previous guidance of $68 billion-$70 billion and $9.60, respectively.

Softness in the global economy has been more pronounced than anticipated, forcing customers to delay projects. Another consequence has been lower order rates from equipment dealers, in an effort to curtail burgeoning inventory levels. In response, Caterpillar has rolled back production activity across many of its factories. As a result, we have sharply lowered our 2012 sales and share-net estimates, to $67.4 billion and $9.50, respectively. (Our previous forecasts called for $69.1 billion and $9.75, respectively.)

However, the company has noted that it is positioned to benefit from positive trends in U.S. construction activity. Moreover, there is optimism that China's recent decision to implement accommodative fiscal and monetary policies (such as investing heavily in infrastructure) will eventually be a boon for heavy equipment demand. On balance, Caterpillar is looking for modest improvement in demand from most corners of the world in 2013, leading to a preliminary sales growth target of 5%. Comparisons are apt to be firmer in the second half of 2013, as dealers continue reducing inventories in the early stages of the year. In all, we are looking for sales and share earnings of $72.0 billion and $10.05, respectively, next year. 

About The Company:Caterpillar Incorporated is the world’s largest producer of earthmoving equipment. Major global markets include road building, mining, logging, agriculture, petroleum, and general construction. Products include tractors, scrapers, graders, compactors, loaders, off-highway truck engines, and pipelayers. Also makes diesel & turbine engines and lift trucks. Foreign sales made up about 68% of the company’s total in 2011.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.