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Caterpillar Expects ’Pause’ in Sales Surge in 2007

Tue October 24, 2006 - National Edition

PEORIA, Ill. (AP) Caterpillar Inc. called an anticipated sales slowdown in 2007 a pause, not the end of a sales surge that has doubled revenues since 2002. Wall Street wasn’t so sure and sent the heavy equipment maker’s shares tumbling Oct. 20, the day of the announcement.

Some analysts said the 14 percent slide in stock price was a market overreaction to a gloomy forecast that overshadowed record third-quarter profits and revenue for the heavy equipment maker.

“Whenever you have a disappointment you can expect a 10 to 20 percent decline that day. I don’t think it will stay down,” said Stephen Coleman, chief investment officer for St. Louis-based Daedalus Capital.

Caterpillar reported that third-quarter profit rose 15 percent, but the results were below analysts expectations. The company also sharply reduced its forecast for the full year and said it expects a slowdown in 2007.

The company lowered its full-year earnings forecast, citing high operating costs and lower-than-expected sales volumes.

Caterpillar also cautioned that the weak residential housing market in the United States and a drop in sales of truck engines will restrain revenue growth next year. The company predicted that new diesel engine emissions regulations that take effect next year will trim sales because buyers have stocked up ahead of the deadline.

On the heels of the report, Caterpillar shares sank $10.02, or 14.5 percent, to $59.00 in extremely heavy afternoon trading on the New York Stock Exchange. More than 59 million shares were bought and sold, or about eight times its average daily volume.

With 656 million shares outstanding, stockholders lost more than $6.5 billion in share value because of the price dive.

Caterpillar officials predicted the company’s sales will rebound after next year, saying energy exploration, mining and infrastructure improvements remain strong worldwide and will continue to push demand for its trademark yellow earth-moving machines.

“We see this as simply a pause. ... There’s a lot of optimism for Caterpillar long term,” said David Burritt, the company’s chief financial officer.

For the third quarter, net income grew to $769 million, or $1.14 per share, from $667 million, or 94 cents per share, a year earlier. The latest period included about $80 million in legal expenses, most to settle a dispute with truck and engine maker Navistar International Corp. over licensing and supply agreements.

Sales jumped 17 percent to $10.52 billion from $8.98 billion a year earlier, boosted by higher prices and increased volumes for both machines and engines. Favorable foreign currency exchange boosted sales by $97 million.

Analysts polled by Thomson Financial forecast earnings, excluding one-time items, of $1.35 per share and sales of $9.87 billion.

The company said it expects full-year revenue of about $41 billion, up about 13 percent from 2005. Caterpillar forecasts profit of $5.05 to $5.30 per share for 2006, with growth coming from higher prices and sales volume. The forecast is down from Caterpillar’s earlier estimate for earnings of $5.25 to $5.50.

Analysts project full-year sales of $39.88 billion and profit of $5.52 per share.

Caterpillar also issued a preliminary forecast for 2007 that projects sales will range from flat to up 5 percent. Profit per share is expected to range from flat to up 10 percent from the midpoint of its 2006 forecast of $5.05 to $5.30.

Scott Burns, an analyst with Chicago-based Morningstar, said Caterpillar’s 2007 sales projections are too conservative.

“It’s a lot better to under promise and over deliver than to over promise and under deliver ... I think you’re still going to see growth, it’s just not going to be the double-digit growth you’ve seen the last few years,” Burns said.

Caterpillar Chairman and Chief Executive Officer Jim Owens said 2007 sales will be slightly higher despite a slowing U.S. economy, weaker housing construction and a sharp drop in sales of on-highway truck engines.

Diesel engine prices are expected to rise next year. That’s because all diesel engines produced starting Jan. 1 must meet new federal regulations that require a 50 percent reduction of nitrogen oxide emissions. Particulate emissions also must be reduced by more than 90 percent from previous government regulations put in place in 2004.

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