Cat Keeps Climbing

Cat Keeps Climbing

Caterpillar Inc.'s net profit climbs 34% on the strength of Asian sales.

MANUFACTURING by Courtney Dentch / Bloomberg News

Caterpillar Inc., the world's largest maker of earthmoving equipment, says second-quarter profit climbed 34%, exceeding analysts' estimates, on demand for backhoes and mining tools in China and the Middle East.

Net income increased to a record $1.11 billion, or $1.74 a share, from $823 million, or $1.24, a year earlier, the Peoria, Illinois-based company says in a statement. Sales rose 20% to $13.6 billion, and Caterpillar raised its 2008 sales forecast.

Developing markets this year may grow more than six times as fast as in North America, where the U.S. may find it hard "to avoid a recession," Chief Executive Officer Jim Owens says in the statement. He also cited "softening" in Japan and Western Europe. Roadwork lifted demand in China and the Middle East, and rising energy prices spurred mining-tool sales in Russia.

Caterpillar says it will raise prices worldwide by 5% to 7% as of January to cope with higher costs for steel, iron ore and crude oil. A bump of as much as 5% for machinery took effect this month. The company, which got 62% of its sales overseas last year, has room to raise prices in part because the dollar has declined 10% in a year against an index of six major currencies.

"We're waiting to see that Caterpillar can give us a sign that there is some improvement in North America," Bill Batcheller, senior vice president of Butler Wick & Co. in Youngstown, Ohio, told Bloomberg Television.

"Obviously, it is not yet. The North American and European growth profiles are pretty weak." Batcheller helps manage $925 million in assets, including Caterpillar shares.

Shares shoot up

Caterpillar rose 1.95 cents, or 2.39%, to $74.98 last week on the day of the news in New York Stock Exchange composite trading. The stock had gained less than 1% this year before that.

The earnings put the company "on track to deliver our fifth straight year of record profits," Owens, 62, says. The average of 19 analyst estimates compiled by Bloomberg was for profit of $1.54 a share and sales of $12.3 billion. The company doesn't provide quarterly forecasts.

For the full-year, Caterpillar now predicts profit of $6 a share, within the range of $5.64 to $6.18 it projected in October. Sales may now reach $50 billion, above the prior forecast of $47.2 billion to $49.5 billion. Analysts, on average, project $6.03 a share and revenue of $48 billion.

"The guidance is disappointing, but probably conservative" based on slowing North American and European growth, says Larry DeMaria, an analyst with Sterne Agee & Leach Inc. in New York. He recommends holding Caterpillar.

"Cat's ability to straddle emerging markets and developed economies gives it the ability to grow the top line in a challenging environment," DeMaria says

Regional sales

Machinery and engine sales grew around the globe, helped by a weak U.S. dollar and led by a 52% gain to $2.24 billion in the Asia Pacific region.

China, one of the world's fastest growing economies, lifted sales on demand for wheel loaders and mining equipment. Caterpillar is building four plants in China to compete with Japanese rival Komatsu Ltd.

In Africa and the Middle East, mining orders countered slowing construction demand in Europe, for overall growth of 22% in the region, to $4.44 billion. Latin American sales climbed 27%.

Sales in the U.S. and Canada revenue rose 7.4%. Caterpillar won a $397.1 million contract during the quarter to supply dozers and armor kits to the U.S. Army.

Rising coal prices are bringing in more sales of mining shovels and trucks in North America, and Caterpillar forecasts revenue will be unchanged to up 3% this year. That's above a prior projection for sales to fall as much as 2%. Caterpillar has been hurt as slowing home construction and tighter lending restrictions in the U.S. cut sales of backhoes and excavators.

U.S. economic outlook

The North American economy may grow about 1% this year, the company says, above its April forecast for growth of 0.5%. Europe will slow to below 2%, while developing economies are forecast to grow 6.5%.

Owens expects the U.S. economy to begin recovering next year, allowing the company to meet its 2010 sales forecast of $60 billion. "I think it would be extraordinarily unusual for the U.S. not to be in a fairly significant recovery by 2010," Owens says. "I don't know when that recovery will start."

Caterpillar, whose economic commentary in October contributed to a decline in the Standard & Poor's 500 Index, today lowered its projection for U.S. housing starts to 980,000 this year, the lowest since 1945.

The company sees "no sign of a recovery in housing" this year and predicts nonresidential building will fall 1%. New construction rose 9.1% to a 1.066 million pace in May, the U.S. Commerce Department says.

Caterpillar has the highest return on equity, at 44%, among 16 peers in a Commercial Vehicles & Trucks grouping of companies. The average was about 26%.