Heavy machinery maker Caterpillar disappointed Wall Street with a second-quarter earnings miss yesterday, hurt by higher costs for raw materials and labour, and its shares fell 6.5 per cent in morning trading.

The maker of equipment used in mining and construction also said economic growth in the US and other developed economies was weaker than expected and reported signs of a slowdown in China, said a report in our sister publication, the Gulf Daily News.

Although Caterpillar raised its full-year sales and profit forecasts, the midpoint of its new range was below analysts' estimates. Shareholders also noted a more cautious tone in the company's economic commentary, closely watched by investors in economically sensitive manufacturing and transport stocks.

Rising prices of commodities like steel and copper, as well as higher transportation and labour costs, hurt profit in a quarter with elevated expectations, said Andrew Meister, equity research analyst with Minneapolis-based Thrivent Financial, which holds almost one million Caterpillar shares across several funds.

"In a quarter where the price increases lag the increases in manufacturing costs, you have a miss like you have today," Meister said. "But what it says is, the long-term outlook for Cat's products appears robust."

Caterpillar's commentary was more subdued than in the past but its forecasts may eventually prove conservative, said Meister, who called yesterday's stock sell-off an overreaction.

Net earnings rose 44 per cent to $1.02 billion, or $1.52 per share, in the second quarter, from $707 million or $1.09 per share a year earlier.

Excluding acquisition costs, Caterpillar earned $1.72 per share, three cents short of analysts' average forecast, according to Thomson Reuters I/B/E/S.

Sales rose 37 per cent to a record $14.23 billion.

"The bottom line disappointed," said Oliver Pursche, co-portfolio manager of the GMG Defensive Beta Fund that holds Caterpillar shares. He said he may buy more of the shares if they fall below $100.

The company faced headwinds from China and Japan, he said, but did a good job growing sales to a record and has been especially successful at expanding in Latin America.

The company said the March earthquake in Japan reduced its operating profit by $60m because it boosted costs. The negative impact from Japan is now past, it said.

Caterpillar said it expects its recently closed acquisition of mining equipment maker Bucyrus to add $2 billion to its sales this year. It estimated 2011 revenue of $54 billion to $56 billion.

Excluding acquisition costs, Caterpillar expects 2011 profit of $6.75 to $7.25 per share, raising its range by 50 cents on either end. Analysts expect $7.08. – TradeArabia News Service