Costs Worsen Cat's Wounds

"Many U.S. industries important to our sales are in recession," Cat said in a press release. "Through the first nine months of this year, housing starts were down 26%, and we expect housing starts for the full year 2007 to be 1.4 million. Nonmetals mining and quarrying is down 18%; coal mining, 4%; nonresidential construction contracting, more than 2%; and freight movements, 2%. We expect further deterioration in most of these industries in the fourth quarter."

Overseas, the company sees continued strong demand as emerging markets build their infrastructures to serve a new era of consumerism.

"Internal demand, as people want a better life, is really driving the global infrastructure story in spite of the weakness in the U.S. and CAT remains a great investment play on that trend," says Blanton. "The long-term picture remains in place, but in the short-term, the company is having some real difficulties."

Caterpillar's Europe/Africa/Middle East business led revenue gains in the third quarter among geographic regions, up 36% to $3.65 billion. Its Asia/Pacific revenue increased 30% to $1.67 billion. Latin America revenue rose 20% to $1.14 billion.

North American revenue, however, fell 11% to $4.99 billion.

"We have become cautious on a lot of domestic industrials," says Longbow Research analyst Eli Lustgarten. "You're looking at a deteriorating domestic environment over the next few quarters."

That said, Lustgarten says Cat sounds overly bearish on the U.S. economy, and he also cited the company's cost controls as a major reason for Friday's selloff.

"They're having more difficulty than they should be managing the cost efficiencies in their supply chain," says Lustgarten. "They're lagging some of their peers, like Parker Hannifin (PH Quote), in that area."