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Caterpillar lifts outlook, profit rises 29%

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Caterpillar Inc. (CAT-N) reported a 29-percent rise in first-quarter profit on Wednesday and beat analyst expectations as the company relied on its growing mining business and sales to U.S. buyers looking to replace aging equipment.

The world's largest maker of construction machinery also increased its profit guidance for the year, but the new forecast may not be strong enough to comfort investors.

Caterpillar stoked Wall Street's fears over emerging markets by repeatedly citing slowdowns in China and Brazil in its earnings press release.

"The quarter was good, but guidance was only increased by the amount of the beat and revenue guidance was unchanged," Jefferies & Co equities analyst Stephen Volkmann said in a note to investors. He said the company's growing inventory levels "may raise some investor concerns."

In recent quarters, Caterpillar has been a leading player in a U.S. industrial sector that has shrugged off economic fears by posting record profits and providing an optimistic outlook. While emerging markets have provided an increasing slice of sales growth, an improving U.S. economy is increasingly underpinning the performance of these companies.

"We just continue to see throughout this quarter that North America continues to be strong for these industrial companies, and that is definitely true for Caterpillar," Jeff Windau, an analyst with Edward Jones, said.

'WE REMAIN ON TRACK'

While traditional construction markets are weak, North American customers are scrambling to replace aging machinery, including excavators and bulldozers. This is taking place as construction companies work to keep up with a backlog of expansion projects in the United States and Canada, including a relative boom in the energy sector.

Many of these construction companies did not buy new machinery during the 2008 through 2010 time frame due to credit constraints and a lack of business. Now, they are rushing into the market, helping drive Caterpillar's backlog to $30.7 billion US, or $10 billion more than it was a year ago.

Another factor driving Caterpillar is growing strength in the mining business, which was bolstered by its 2011 acquisition of Wisconsin-based Bucyrus. The company's power equipment sales, including locomotives and engines needed for gas and oil companies, are also running at a solid clip.

"We remain on track...at a time when U.S. construction activity remains depressed and economies in Europe, China and Brazil have slowed," Caterpillar chief executive Doug Oberhelman said in a press release. The slowing in China and Brazil comes as those countries "took steps in 2011 to slow their economies and bring inflation under control," Oberhelman said.

Both economies are expected to ease their policies. "Although it's tough to predict the exact timing, we expect positive economic growth moving forward," Oberhelman said.

The company will need its prediction to hold as it steadily installs and expands global production capacity, leading to a brisk hiring pace and increased costs related to lifting production and headcount. In addition, material costs -- including steel prices -- continue to rise.

MARGIN STRENGTH

Analysts were encouraged by the company's incremental profit margins during the quarter, which were robust even as the company only modestly raised prices.

"We thought the quality was good, especially in margins that continue to improve without relying on the pricing lever," Rob Wertheimer, a Vertical Research Partners analyst, said. The company's strategy of lifting profit margins via productivity and cost improvements on the plant floor is paying off, he said.

The strength in North America as emerging markets sag is actually a positive trend for Caterpillar, Morningstar analyst Adam Fleck said. Chinese customers tend to buy a larger percentage of smaller, less-expensive machinery while buyers in established markets more often opt for bigger goods.

Caterpillar reported net earnings of $1.6 billion, or $2.37 per share, compared with $1.2 billion, or $1.84 per share, a year earlier.

Caterpillar's sales rose 23 percent to $16 billion during the first quarter, the company said.

Analysts on average had projected a profit of $2.13 a share, according to Thomson Reuters I/B/E/S. Revenue, however, fell short of the $16.2 billion that Wall Street had expected.

The company increased its profit outlook for the year to $9.50 per share from $9.25 previously. The outlook for revenue, however, remained in the range of $68 billion to $70 billion.

Caterpillar's resources segment, which includes mining, was delivered a 73 percent increase in revenue and a 46 percent jump in earnings. Construction products reported a 13 percent jump in both sales and profit.

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