Bloomberg News

Caterpillar’s Earnings Signal Exports to Boost U.S. Expansion

October 25, 2011

Oct. 25 (Bloomberg) -- Caterpillar Inc.’s better-than- estimated profit and sales reinforce forecasts that exports and capital spending will help the U.S. maintain its economic expansion.

The third-quarter earnings announcement by the world’s largest construction and mining-equipment maker pushed U.S. shares higher yesterday as the Standard & Poor’s 500 Index came within 0.3 percent of erasing its 2011 loss. Peoria, Illinois- based Caterpillar said 2012 revenue will gain as the U.S. and world economies improve.

“The global economy is growing, and the American companies that can tap into that broader economy can still post satisfactory results,” said Adolfo Laurenti, deputy chief economist at Mesirow Financial Inc. in Chicago.

Corporate investment in new equipment may have contributed to an acceleration in growth last quarter, along with a pickup in consumer spending. The world’s largest economy probably expanded at a 2.5 percent annual pace in the three months ended in September, according to median estimate of 82 economists in a Bloomberg survey ahead of an Oct. 27 Commerce Department report. That would be the fastest pace in a year.

Net income at Caterpillar climbed 44 percent to $1.14 billion, or $1.71 a share, from $792 million, or $1.22, a year earlier, Caterpillar said in a statement yesterday. That exceeded the average of 15 analysts’ estimates compiled by Bloomberg for $1.57 a share.

The S&P 500 index climbed 1.3 percent to 1,254.19. Caterpillar rallied 5 percent to $91.77 a share, the highest since Aug. 3.

Heightened Risks

Without the support of exports, agriculture and industrial machinery, the U.S. economy would face heightened risks of a renewed downturn, said Laurenti, whose firm oversees $59.1 billion in assets.

“If those sectors did slow down without much momentum anywhere else in the economy, we might be at risk of slipping down into a double dip recession,” Laurenti said in a telephone interview.

A report from the Commerce Department on Oct. 26 will show a 0.4 percent rise in September orders for durable goods excluding transportation equipment, according to the median forecast in a Bloomberg survey.

While the European debt crisis and the level of U.S. growth are concerns, they don’t “signal the onset of recession,” Caterpillar said in a statement. The world economy will grow 3 percent in 2011 and 3.5 percent in 2012, with the U.S. and Japanese post-earthquake reconstruction accounting for much of the improvement, it said.

Four-Month Low

The U.S. trade deficit was little changed at a four-month low of $45.6 billion in August as near-record exports helped keep the economy expanding, the Commerce Department reported this month.

Shipments abroad valued at $177.6 billion were the second- highest ever, the report showed. Growing sales overseas, particularly to economies in Asia and Latin America, are underpinning manufacturers such as Alcoa Inc., the largest U.S. aluminum producer.

China’s economy will expand by about 9.3 percent this year and about 9 percent in 2012, Caterpillar said. That compares with the company’s forecasts for 1.7 percent U.S. growth this year and 2.5 percent next year.

Caterpillar’s outlook is in line with the median forecast in a Bloomberg news survey of economists, which calls for U.S. growth of 1.7 percent in 2011 and 2 percent in 2012. The economists put the odds of a return to recession in the next 12 months at 30 percent, according to the median estimate of 51 economists. The survey was conducted from Oct. 5 to Oct. 11.

General Electric

Overseas sales also remain a source of strength for General Electric Co., Jeffrey Immelt, the chairman and chief executive of GE, said last month.

“We still see robust demand for our infrastructure products” in the face of “the global volatility,” Immelt said Sept. 26 in India. “We still feel quite good about our prospects on a global basis.”

Exports and capital spending are helping to sustain an economy hobbled by 9.1 percent unemployment and home prices that were 31 percent lower in June from the 2006 peak.

“If you’re Caterpillar you’ve got decent export markets and you’re doing well,” Robert Dye, chief economist at Comerica Bank in Dallas, said in a telephone interview. “But if you’re in real estate in Florida you’re not doing well. It’s a very uneven economy right now. For many sectors, for many regions, this is not a recovery.”

Aging Equipment

Demand to replace aging equipment is the main driver in the U.S. for Caterpillar, and rising dealer rental fleet utilization is also positive, Chief Financial Officer Ed Rapp said in a telephone interview yesterday. More broadly, the company sees U.S. economic growth improving amid low interest rates, inflation that’s under relative control and “very good” liquidity, Rapp said.

Caterpillar’s outlook is “primarily based on what we would consider relatively low growth in the U.S., but not a double dip,” Rapp said. U.S. demand is rising from an “incredibly low base.”

Caterpillar said it added 4,800 jobs in the quarter, 2,000 of them in the U.S. The company employed a total of 121,513 full-time workers on Sept. 30 and 27,385 “flexible” workers.

“Although there is a good deal of economic and political uncertainty in the world, we are not seeing it much in our business at this point,” said Chief Executive Officer Doug Oberhelman in yesterday’s statement.

--Editors: Christopher Wellisz, Simon Casey

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net Shruti Singh in Chicago at ssingh28@bloomberg.net;

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net; Christopher Wellisz at cwellisz@bloomberg.net


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