Caterpillar Profit Outpaces Estimates, Raises Forecast


Caterpillar reported better-than-expected quarterly earnings on Friday and raised its outlook, saying "exceptional growth" overseas offset weakness in the U.S. residential housing and truck engine markets.

Shares of the manufacturer of heavy construction and mining equipment surged 4.6% and gave the overall market a boost.

Caterpillar, which also makes diesel and natural gas engines and industrial gas turbines, attributed the strong performance to improved economic growth in Europe and continued high commodity prices worldwide, which have sparked investment in the mining and oil sectors.

While net profit fell to $816 million, or $1.23 a share, from $840 million, or $1.20 a share, last year, the latest results topped the average analyst profit expectation of $1.08 a share.

Sales and revenue rose 7% to $10.02 billion. Even stripping out the $695 million in revenue generated by its financial products unit, Caterpillar reported machinery and engine sales of $9.321 billion, easily beating the Wall Street outlook of $8.910 billion.

Overseas Sales

Eli Lustgarten, an analyst at Longbow Research, said the results showed that while North American trucks and housing are "material markets," they're "not all that important because Caterpillar is so international and so diversified."

That's a message Caterpillar has been trying to get Wall Street to accept in recent months -- not always successfully. The results released Friday provided the proof.

In all, sales to North America tumbled nearly $1 billion, pulled down by a $450 million decline in machine sales that Caterpillar attributed to a "steep drop in housing construction" as well as a decline in nonresidential building.

But those declines were offset by machine strength in Europe, Asia and the Middle Africa, where sales jumped $560 million, or 44 percent, as well as double-digit sales gains in Latin America and Asia.

"That's something people need to understand about us," Dave Burritt, the company's chief finance officer, said in an interview. "We're often mistaken as just a North American manufacturer. We're very different. We're a global player."

Engines Strong

Another huge chunk of the quarter's gain came from Caterpillar's engine unit, where revenues jumped despite the drop in demand for on-highway engines in the United States. It cited strong sales to marine, electric power and industrial customers worldwide.

"Engines saved the day," Ann Duignan, an analyst at Bear Stearns, said in a note to investors.

Investors have been girding for a sharp drop in the sale of big trucks -- and the diesel engines that power them -- because of a new U.S. clean-air rule that took effect Jan. 1.

Looking forward, Peoria, Illinois-based Caterpillar raised its sales outlook to a range of between $42 billion and $44 billion, up from its earlier estimate of $41.5 billion to $43.6 billion.

It also raised its profit target to a range of $5.30 to $5.80 a share, up from $5.17 a share in 2006, and its earlier estimated range of $5.20 to $5.70.

It did so, even though it lowered its forecast for 2007 U.S. gross domestic product growth to 2%, down from 2.5%, and cut its sales forecast for North America.

But the company raised its outlook for 2007 sales in Europe, Africa, the Middle East and Latin America.