Caterpillar: Investors' China Obsession Sinks

Caterpillar (CAT) has been on such a huge run in recent years — nine straight quarters of earnings growth — that any hint of weakness can hurt. Despite another earnings beat ($2.37 versus $2.13) and guidance raise by Caterpillar on Wednesday, investors are focused on the company''s statements about slower growth in China and other parts of the developing world. Revenue of $15.98 billion fell below Wall Street expectations for $16.22 billion. CAT shares fell2.4% early.

"Sales of construction equipment in China have been weaker than we previously expected, and we have revised our forecast down in China. While we have seen some evidence of improvement in Brazil, it is not occurring as fast as we expected, and we have also revised our full-year expectations down for Brazil," Caterpillar said in a statement. The company added that "stronger sales in North America are expected to about offset reductions in China and Brazil.," but that''s clearly not assuaging investors'' concerns.

Vertical Research Partners analyst Rob Wertheimer, however, argues that investors should not have been surprised by the weakness.

"CAT took down its internal China construction forecast, which should not be a surprise given the industry has continued to be down 50% with Cat losing share. CAT built inventory in China for a sales ramp that did not materialize, a negative. Inability to gain share not that capacity is not a constraint is an issue to explore, though China construction is not a huge business for CAT. Brazil weakness is also not a surprise but confirmation is a slight negative."