Foreign demand drives Caterpillar profit up
That was Mother Nature who made the earth move Friday morning, not Caterpillar Inc.
But the world’s leading earthmoving equipment manufacturer was almost as surprising in its first quarter financial results, announced Friday and greeted warmly by Wall Street.
Proving again that foreign demand for its product was enough to offset a continually worsening U.S. economy, Caterpillar had a record-setting first quarter and beat Wall Street expectations as well.
Caterpillar reported a first quarter profit of $922 million, or $1.45 a share, a 13 percent increase over the profit of $816 million, of $1.23 a share, earned in the first quarter of 2007.
That was well above the $1.33-per-share profit expected by industry analysts surveyed by Thomson First Call.
First quarter sales and revenues were a record $11.79 billion, 18 percent above the first quarter 2007 sales and revenues of $10.02 billion.
The company reiterated its outlook for 2008, saying it still expects the year to be another record setter in sales (up 5 percent to 10 percent) and profits (up 5 percent to 15 percent) even though it believes U.S. markets will be worse than originally believed. Caterpillar believes foreign markets will be stronger than earlier believed.
Investors responded, as nearly three times the average daily volume of shares were traded and the stock value shot up to $85.20 a share. That was up $6.61, or 8.41 percent, a share and just shy of the company’s 52-week high of $87 a share. Nearly 20 million Caterpillar shares were trades on the New York Stock Exchange on Friday.
"I am pleased to be able to report record results this quarter, particularly given the tough economic conditions we’re experiencing in the United States," Chairman Jim Owens said in a statement.
"These record results are a remarkable testament to our global strength, the diversity of the end-markets we serve and the strength of our integrated service businesses. Particularly notable, our Financial Products business had their best first quarter ever for revenues and profit, despite credit market challenges."
In a conference call with analysts, Owens repeated what he has said before, that he believes by 2010 the United States will have "a nice economic recovery, as long as we don’t do anything silly, policy-wise."
Later, in a meeting with reporters, Mike DeWalt, director of investor relations, and Dave Burritt, chief financial officer, said the worsening of the U.S. market has been a continuing surprise for the company. The fact sales in North America were up 4 percent in the first quarter was mostly because of strength in Canada and the fact dealers were increasing their inventories ahead of spring and summer sales.
They said Caterpillar’s outlook for the rest of 2008 was overall unchanged — sales up 5 percent to 10 percent and profit up 5 percent to 15 percent — because of foreign sales.
Burritt noted that exports were 27 percent higher in the first quarter this year than in the same period last year. In the quarter, 58 percent of all sales were outside the United States, compared with 53 percent in the first quarter last year.
Another positive surprise, DeWalt said, was that engine sales were up 13 percent, largely because of sales of large engines used in the oil and gas and mining industries.
Burritt cited the record revenues of Caterpillar’s financing arm, Cat Financial Products. It reported revenues of $817 million, 18 percent higher than a year earlier.
At a time other financing companies are struggling, Burritt said: "It keeps going strong. It’s a great story."
Analysts said the fact Caterpillar had another strong quarter and that foreign sales were better than domestic sales was expected, but not the strength of the foreign markets, especially emerging markets.
"We expected sales to be stronger outside the United States, but the strength of the emerging markets was a little bit of a surprise," said Matt Collins of Edward Jones. "I can’t believe the rates we’re seeing in the emerging markets can be sustained that much longer. Then again, for the first time in recent history, the U.S. economy sneezed and the rest of the world has not caught a cold."
John Kearney of Morningstar agreed the strength of foreign sales was more a surprise than U.S. weakness. He added, however, that there are signs of weakening in the residential construction markets in western Europe. "We’ll watch closely to see if other markets follow the lead."
Still, Kearney noted, he believes the infrastructure needs of emerging markets — the chief factor in Caterpillar’s strength in those markets, especially in Asia — "is more than enough at this point to offset the weak markets here, at least until we start to see them turn."
Kearney and Collins agreed Caterpillar still has much work to do to contain costs. Analysts and investors are now used to the company’s higher costs digging into profits and are being patient with Caterpillar’s implementing its new operating systems in its plants, they said.
"But they are going to have to get those under control, before they have more of an impact," Collins said.
Other negatives noted were that margins were down because of the negative impact of currency — namely, the weak dollar — and an unfavorable product mix.
Highlights of the financial report, which can be viewed in its entirety on Caterpillar’s Web site, www.cat.com, include:
n Machine sales were up 16 percent overall and saw gains in every region of the world, topped by 35 percent growth in the Asia/Pacific region.
n Engine sales were up 22 percent overall and increased in all regions, including 40 percent in Asia/Pacific.
n Manufacturing costs were up about 2 percent more than the first quarter of 2007, largely because of higher material, labor and overhead costs.
n Worldwide employment was 102,623 at the end of the first quarter, up 7,289 from a year earlier.
Paul Gordon can be reached at (309) 686-3288 or email@example.com.