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Caterpillar Changes Tack, Cuts Production to Meet Falling Demand

Breaking their usual pattern of building inventory during declining markets, Caterpillar will instead downsize production for the short term future.

Caterpillar Inc. shares rebounded as investors welcomed the move by the company to cut production, helping it navigate the global economic downturn.

“We are taking steps to reduce production to match dealer demand,“ Chief Executive Officer Jim Umpleby said Wednesday, adding that the company is staying nimble and ready to ramp up, should appetite for its machinery improves.

Shares of the world’s largest maker of mining and construction equipment rose 1.1% at 1:30 p.m. in New York. The stock earlier fell as much as 2.2% after the company cut its profit outlook this year, citing global economic uncertainty.

“In prior cycles what Caterpillar has done is it would continue to build inventory into the market that was declining,” Ann Duignan, a machinery analyst at JPMorgan, said in a Bloomberg Television interview. “This time around they’ve decided to cut production very quickly, very rapidly into the Q4 , and if this is a one-and done then this is the time investors want to buy Caterpillar.”

The Deerfield, Illinois-based company reported the first decline in quarterly profit in almost three years and said it expects demand to be flat in the fourth quarter.

“When there is global uncertainty, uncertainty in the economic outlook, they probably defer making those decisions,” Chief Financial Officer Andrew Bonfield said in a telephone interview, referring to the company’s end-users. “Our customers are not facing financial difficulties. It’s more that they seem to be waiting to see what happens with the economic outlook for making decisions.”

TAGS: Supply Chain
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