Caterpillar Loses Legs

Updated from 11:23 a.m. EDT

After a big run, Caterpillar (CAT) signaled Friday that it may be slowing to a crawl.

The construction-equipment giant posted third-quarter earnings that missed and cut its outlook for the year, citing higher costs and a weakening housing market. The company also issued a weak 2007 guidance, saying it expects a "pause" in U.S. economic expansion.

The news sent shares of the Dow component tumbling 13% and weighed on other stocks in the heavy-equipment sector.

Caterpillar earned $769 million, or $1.14 a share, for the quarter ended last month, up from the year-ago $667 million, or 94 cents a share. Revenue rose 17% from a year ago to $10.52 billion.

Analysts surveyed by Thomson Financial were looking for a $1.35-a-share profit on sales of $9.87 billion.

In Caterpillar's machinery division -- which represents about two-thirds of profits -- sales increased 15% in the third quarter, but margins fell due to higher manufacturing and sales costs. This resulted in just 2% operating growth in the division.

But it was Caterpillar's outlook that rally tore at the stock. The company's trimmed its 2006 profit forecast to $5.05 to $5.30 a share from the previous projection of $5.25 to $5.50. The company expects sales to rise 13% from a year ago to $41 billion. Analysts were looking for earnings of $5.52 a share and a top line $40 billion.