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Caterpillar Sees Long-Term Profitability

Thu August 13, 2009 - National Edition
Daniel Lovering

Caterpillar Inc.’s top executive said Aug. 4 the heavy equipment maker was poised to benefit from a global economic recovery, but that it will remain profitable even if the recession lingers.

The world’s largest maker of mining and construction equipment expects the world economy to improve, though the timing of the upturn remains uncertain, CEO Jim Owens told analysts gathered at the company’s Peoria, Ill., headquarters.

Caterpillar backed its 2009 forecast and said it anticipates profit of $8 to $10 per share within five years if the world economy recovers and $2.50 per share annually if the recession drags on.

“We believe recovery will come — it seems more likely now than it did four or five months ago,” Owens said in remarks broadcast over the Internet. “We’re going to benefit by the world’s need for basic infrastructure, basic commodities. Essentially, without our equipment, you can’t get there.”

But Caterpillar should be able to earn $2.50 per share, “even if we go into a global recessionary funk” and sales remain at depressed levels, he added.

Shares of Caterpillar climbed $2.77, or 6.1 percent, to close at $47.89.

The forecast comes after Caterpillar reported a 66 percent drop in second-quarter earnings last month, citing dwindling sales of its products and the cost of job cuts. But it said the global economy may be starting to stabilize and raised its annual outlook.

On Aug. 4, Caterpillar affirmed that outlook of revenue of $32 billion to $34 billion and profit of $1.15 to $2.25 per share, excluding costs tied to work force reductions.

Analysts surveyed by Thomson Reuters, on average, predict Caterpillar will earn $1.43 per share on revenue of $33.26 billion.

The company based its optimistic outlook partly on evidence that government stimulus plans, particularly in China, were beginning to work. Caterpillar’s global reach and diverse products — from road paving machines to cargo ship engines — give a measure of industrial health.

That came after Caterpillar reported its first quarterly loss in 17 years in April, partly due to weak sales and costs associated with laying off thousands of workers.

In recent months, Caterpillar has undertaken broad cost-cutting measures, including the planned elimination of more than 22,000 positions and sweeping production cuts. It employed 112,887 people at the end of 2008 and 95,761 at the end of June.

“We have a great strategy, and we’re hell-bent to execute that strategy,” Owens said Aug. 4.

The high end of Caterpillar’s long-term forecast takes into account a typical economic recovery, low inflation and interest rates, government stimulus plans and demand for equipment as economies grow around the world, he said. Some of that demand would be fueled by a need to replace aging mining trucks used heavily during the commodities boom of recent years.

And the world’s demand for infrastructure remains very high, Owens said, particularly in the United States, which has underinvested in it for some time. Caterpillar continues to focus on emerging markets, which are building infrastructure “as they can afford it,” he said. Last year, Caterpillar generated 67 percent of its revenue overseas.

Under a “great recession” scenario, Caterpillar sees “very sluggish growth,” resulting from economic problems in developed countries, with deficits and tax rates rising and central banks tightening policies amid concerns about inflation, Owens said.

“Looking forward, there is far too much uncertainty to know when the global economy will turn toward robust positive growth,” he said in a statement, “but no matter what happens, Caterpillar has the people, products, dealer support and strategies to prosper.”

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