The Rising Influence of Rising Affluence

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CAT 3Q11 Profit Jumps 44% on Revenue Surge

[For archival purposes—story is from 10/25/11.]

http://online.wsj.com/article/SB10001424052970204644504576650813757554474.html

›OCTOBER 25, 2011
By JAMES R. HAGERTY And OLIVIA GENG

Caterpillar Inc., the world's largest maker of construction and mining equipment, reported a 44% surge in its third-quarter earnings and said it is finally regaining market share in the Chinese market.

The Peoria, Ill., company's stronger-than-expected profits and forecast of a between 10% and 20% sales increase in 2012 helped push up the company's shares and the broader U.S. stock market on Monday. The bullish report comes amid warnings from some other big companies about a dimming outlook for 2012 and shows the resilience of construction outside of North America and Europe, fed by expectations of huge needs for more roads, airports and other infrastructure in China and other fast growing markets.

The company also said it expects continued strong gains in Asia, Latin America and other emerging markets, despite efforts by China to contain inflation.

Until recently, Caterpillar was losing market share in China—which accounts for around half of total world demand for construction equipment—to such rivals as Komatsu Ltd. of Japan and Sany Heavy Industry Co. of China. In 2010, Caterpillar's market share for excavators in China was 7%, trailing Komatsu's 15% and Sany's 9%, according Off-Highway Research, a London-based research and consulting firm.

Caterpillar declined to provide market-share data but said its sales of construction equipment in recent months have outpaced the market as a whole. "We're seeing market share gains," Doug Oberhelman, the company's chief executive, told analysts. That's partly because expanded output in China has allowed the company to increase shipments to its dealers there.

Caterpillar's timing could have been better. Its surge in production comes amid a slump in sales of such equipment in China as authorities have pushed up interest rates to slow construction and bring inflation under control. That policy has created at least a short-term glut of equipment on the market. The glut may put downward pressure on prices; Caterpillar's finance chief, Edward Rapp, said in an interview that there isn't any sign of that yet.

Richard Lavin, Caterpillar's group president in charge of construction equipment, said the company has had to race to catch up because it previously underestimated China's growth potential and didn't have enough manufacturing capacity there to meet demand in recent years. "We simply undershot the industry," said Mr. Lavin, who moved to Hong Kong last year to keep closer tabs on China and other Asian markets.

Caterpillar has a reputation for quality among Chinese construction firms but still is struggling to persuade more Chinese buyers to pay the premium prices it charges. Tang Long, who owns a small construction company in China's Guangxi province, said he recently bought an excavator made by Komatsu because the price was lower. In the future, he said, "if I have enough money, I will buy Caterpillar."

Eaton Corp., a major supplier of hydraulic parts for construction equipment, said it expects the Chinese market to recover by mid-2012, partly because of a government push to build more low-income housing. "China is successfully engineering a soft landing" for its economy and will keep growing fast, Alexander Cutler, Eaton's chief executive, said in an interview.

Caterpillar also is betting heavily on continued strong growth for mining equipment. In July, it acquired a smaller U.S. maker of such equipment, Bucyrus International, for $8.8 billion. Caterpillar officials said mining companies are proceeding with heavy investments in expansion despite a recent softening of metal prices.

Caterpillar's income in the third quarter ended Sept. 30 was $1.14 billion, or $1.71 a share, up from $792 million, or $1.22 a share, a year ago. Sales surged 41% to a record $15.72 billion. Excluding the effects of the Bucyrus acquisition, sales were up 31%.

The company's order backlog, excluding Bucyrus, rose to $24.4 billion at the end of the third quarter from $21.9 billion three months before. Caterpillar said it expects sales for the full year of about $58 billion, up 36%. Previously, the company forecast 2011 sales of between $56 billion and $58 billion.

During a conference call with analysts, Mr. Oberhelman said the company is looking for a slow-growth recovery going into 2012. "Although there is a good deal of economic uncertainty in the world, we are not seeing it much in our business at this point. We do not hear anecdotally from dealers or our customers that there is less work today than there was a year ago."

Analysts surveyed by Thomson Reuters expected earnings of $1.54 a share on revenue of $15.04 billion.‹