The Wall Street Journal-20080126-Earnings Digest -- Industrial- Overseas Growth Lifts Caterpillar
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Earnings Digest -- Industrial: Overseas Growth Lifts Caterpillar
Caterpillar Inc., now firmly looking outside the U.S. for its growth, said fourth-quarter profit rose 11% on booming overseas demand. The heavy-equipment manufacturer's outlook for the U.S. economy darkened.
The Peoria, Ill., company, seen as a barometer of economic health, said recession-like conditions are developing in the U.S., but it believes international growth will hold up, led by developing countries. Caterpillar cut its 2008 U.S. economic-growth forecast to 1% from 1.5% but reiterated its own outlook for earnings growth of 5% to 15% and revenue growth of 5% to 10% for the year.
The comments follow a tumultuous week in markets as investors world- wide worried that a U.S. recession wouldn't be contained. Citigroup analyst David Raso said Caterpillar's reaffirmed outlook was welcome, given the level of concern ahead of its earnings report.
Caterpillar shares were up 68 cents, or 1%, to $65.93 in 4 p.m. New York Stock Exchange composite trading Friday.
Caterpillar, like many other U.S. manufacturers, is relying increasingly on sales outside of its home region. Markets such as China present immense business prospects for industrial-machinery companies as rapid economic development spurs construction of airports, highways, mines and irrigation projects. Caterpillar said sales in the Asia-Pacific region rose 36% in the fourth quarter, with China accounting for the bulk of that rise. Russia, India and oil-rich Middle Eastern countries are also spending heavily on infrastructure.
Caterpillar said it will add capacity in China and India: "We are just woefully short of capacity to address that market," said Doug Oberhelman, a group president, on a conference call with investors.
Sales in North America accounted for 44% of total 2007 revenue of just under $45 billion, after representing 53% of the total in 2006. Fourth-quarter sales in North America fell 11% amid weakness in housing and nonresidential construction and a drop in engine sales that the company blamed on sinking demand for new on-highway trucks.
Chief Financial Officer David Burritt said it is hard to say how much further the North American share of total business could fall. "No matter what happens, we're going to flex our work force, flex our manufacturing facilities to meet the demand of customers wherever they are," he said.
Machinery sales -- such as those of backhoe loaders, harvesters, hydraulic excavators and paving equipment -- rose 13% in the quarter even as North American sales in the segment fell 7%. Despite the challenges, Caterpillar said, "If the Fed continues to cut interest rates, as we expect, and the U.S. government takes action to stimulate economic growth, 2008 could be the bottom of this U.S. machinery cycle."
Caterpillar expects core operating costs, which exclude the impact of currency fluctuations, to rise between 2% and 2.5% in 2008, in line with its forecast for inflation. In 2007, core operating costs increased by $1.23 billion over the previous year, a bigger jump than company executives had expected, in part because raw-materials costs were higher than anticipated.
For 2008, the company predicts a 1% to 1.5% increase in materials costs and a 15% to 20% increase in research-and-development spending, to support a significant investment in new products, mostly to meet emissions requirements.
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Jon Kamp and Ilan Brat contributed to this article.
