Replies to post #1404 on The Rising Influence of Rising Affluence

[DewDiligence]

CAT’s Diesel Engine Gets Low-Emission Certification

[This approval could accelerate the upgrade cycle for heavy construction machinery—maybe.]

http://www.reuters.com/article/idCNN1712650420100817

›Tue Aug 17, 2010 9:43am EDT

BOSTON, Aug 17 (Reuters) - Caterpillar Inc (CAT), the world's largest maker of earth-moving equipment, said on Tuesday it had received key approvals from U.S. and European regulators for its C9.3 ACERT engine.

The engine will meet new emissions regulations for off-road engines that take effect on Jan. 1 and require a 90 percent reduction in the amount of diesel particulate matter released and a 50 percent reduction in the amount of nitrogen oxide released.

The Peoria, Illinois-based company will use the engine in vehicles including mid-range tracked tractors as well as hydraulic excavators.‹

[DewDiligence]

Caterpillar, Deere Get Big Boost from Latin America

[Although CAT put up blowout numbers for 3Q10, I remain skeptical that they can achieve their 2012 EPS guidance of $8-10 (#msg-40778863). After the huge run-up during 2009-2010, I think CAT is fully priced; as mentioned in #msg-51542061 and #msg-52959838, I prefer DE as a core holding in the heavy-equipment arena.]

http://online.wsj.com/article/SB10001424052702304023804575565860305146140.html

›OCTOBER 22, 2010
By JAMES R. HAGERTY And PAULO PRADA

Caterpillar Inc. became the latest U.S. company to report a lift from Latin America—underscoring the region's rise as an engine propelling earnings when growth in much of the developed world is distressingly slow.

The heavy-equipment maker, which reported higher-than-expected profit Thursday, is just one of many companies feeling the effects.

Latin America's quick rebound from the global recession is a shot in the arm for many multinational companies struggling for new business in the U.S., Europe and Japan. While its economic clout is no match for China's, the region is emerging as a source of sorely needed industrial demand.

Other big U.S. manufacturers that have seen strong sales in Latin America, particularly Brazil, help boost their quarterly profits and forecasts for the year include Eaton Corp. and Parker Hannifin Corp.

Engine-maker Cummins Inc. expects to more than double its annual sales in Latin America to around $2.2 billion in 2014. CNH Global NV, which makes agricultural equipment under the Case IH and New Holland brands, said Thursday that Latin America accounted for 19% of its third-quarter sales, up from 14% for all of 2009.

Two factors underlie Latin America's economic strength. The first is that, like so many of the world's commodity producers, it is benefiting from China's voracious appetite for raw materials.

"China's growth really drives consumption of commodities, and Latin America benefits from that big time," said Edward Rapp, chief financial officer of Caterpillar, which raised its profit forecast for the year after its earnings nearly doubled in the third quarter to $792 million, largely due to strength in Latin America and Asia.

The International Monetary Fund expects Latin America to post economic growth of 5.7% this year, compared with the 2.7% growth it projects for the world's advanced economies and 4.8% for global growth as a whole.

"Latin American has recovered strongly…led by Brazil, where [inflation-adjusted gross domestic product] growth has been running close to 10% since the third quarter of 2009 and the economy is now showing signs of overheating. A number of other economies have also returned to solid growth. Mexico is lagging, partly because of its strong trade linkages with the U.S," the IMF said in a recent IMF World Economic Outlook.

The second factor in the region's strength is that Latin America avoided the worst excesses–such as the complex structured financial instruments–that crippled richer economies during the recent financial crisis. In addition, Latin American policy makers, tested by the region's past economic troubles, steered their way out of the crisis with skill and success.

At Caterpillar, sales in Latin America, its hottest region, surged 95% to $1.76 billion during the third quarter, outstripping increases of 51% in Asia and 55% in North America. Its share of total sales coming from Latin America rose to 16% in the quarter from 12% a year earlier.

Asia accounted for about 23% of the company's sales and North America 38% in the latest quarter.

Despite the newfound allure of the region, Latin America as a whole is still a challenging place to invest, given the hodgepodge of legal and regulatory frameworks in place across the region.

Even Brazil, one of the current darlings of foreign investors, presents what many investors consider a confusing and costly array of tax and labor laws, in addition to other red tape.

Brazil ranked 129, well behind other emerging markets, such as China, South Africa and Indonesia, in the World Bank's most recent "Doing Business" survey, which compares countries world-wide in areas ranging from hiring and financial conditions to how easy it is to start a business.

Still, the proceeds from Latin American exports of commodities—such as iron ore, copper and soybeans—are fueling investments in roads, airports and other infrastructure there, and some of the region's economies are growing at rates rivaling China, a situation many foreign companies and investors find hard to resist.

Brazil, the region's biggest economy and the eighth largest in the world, is on track to grow 7.7% this year, according to Barclays Capital. Barclays forecasts growth of 10.6% in Argentina, 5.7% in Chile and 8.9% in Peru. That compares with its 2010 growth forecasts of 10.1% for China and 2.8% for the U.S.

Many U.S. manufacturers are bullish on the region. Don Washkewicz, chief executive of Parker Hannifin, a Cleveland-based maker of valves, filters, pumps and other items used in airplanes, trucks and machinery, said in an interview this week that Latin America is "one of our leading regions now as far as growth....It's going to level off, but at a high level."

Earlier this week Eaton, another big Cleveland-based manufacturer, reported surging Latin American demand for heavy-duty trucks and agricultural equipment, for which Eaton makes components.

Latin America's rebound reflects years of efforts by some of the region's governments to adopt more orthodox economic policies to control inflation and government spending.

Though populist economic policies still threaten a handful of the region's economies, notably Venezuela and Argentina, other countries have curbed years of runaway inflation.

Since the mid-1990s, Brazil has slashed public debt, balanced government books and introduced a new currency that trades freely on the open market.

That rapid growth is drawing big inflows of investment. This week, Pfizer Inc. agreed to pay $238 million for a 40% stake in a generic-drug maker in Brazil and took an option to buy the rest of the company [#msg-55730886].

Earlier in the year, Royal Dutch Shell PLC agreed to invest $1.63 billion to create a joint venture with a Brazilian company for greater access to the country's giant ethanol industry.

Caterpillar recently bought a former truck plant in Campo Largo, Brazil, and is expanding it into a factory that will make backhoe loaders and other construction equipment.

"We'll see some cooling in sales growth for some types of machinery in 2011 but the longer-term trends remain very robust," said Meredith Taylor, a New York-based analyst at Barclays, who visited Brazil two weeks ago. She said Brazil's need for better roads, railways, ports and low-cost housing should continue to fuel sales for makers of construction, mining, agricultural and other machinery for several years. Among other things, she cites efforts to improve crumbling roads and other infrastructure for the 2014 World Cup soccer tournament and 2016 Summer Olympics in Brazil.

Companies with strong local manufacturing facilities in Latin America—including Caterpillar, Cummins and farm-equipment makers Deere & Co. and AGCO Corp.—are most likely to benefit, said Ms. Taylor. She added that Chinese equipment makers are emerging as competitors in the region.

Caterpillar, based in Peoria, Ill., said Thursday that its third-quarter global net income rose 96% to $792 million, or $1.22 per share, from $404 million, or 64 cents a share, a year earlier, easily topping Wall Street forecasts of around $1.09 a share. Sales jumped 53% to $11.13 billion.

The company expects earnings per share of $3.80 to $4 for the full year, up from $1.43 in 2009. Previously, Caterpillar forecast earnings of $3.15 to $3.85 for 2010. The company said it expects sales "approaching" $50 billion [whatever that means] in 2011, compared with the $41 billion to $42 billion expected for all of 2010 and the depressed level of $32.4 billion in 2009. Caterpillar reiterated a sales target of $55 billion to $60 billion for 2012 [see comments in the prologue of this post].

Deere doesn't disclose its sales from Latin America. AGCO hasn't released third-quarter earnings, but in the first half of this year 27% of its sales came from South American, up from 12% a year earlier. Cummins, which has yet to released third-quarter results, reported that 11% of its second-quarter sales came from Latin American, up from 10% a year earlier.

Interest in the region has generated a flood of investments by hedge funds, private-equity groups and other financial investors. The tide of incoming capital has pushed up the value of local currencies and is prompting policy makers to adopt measures to slow it down. Brazil this week raised the tax it charges on foreign purchases of fixed-income securities for the second time this month. On Thursday, Chile said it would streamline export procedures to help lower costs for Chilean exporters, whose goods have become increasingly expensive on the global market because of the strength of the Chilean peso.

Speaking last week in Bogota, Colombia's capital, Nicolas Eyzaguirre, a former Chilean finance minister who is now regional head of the IMF, said: "We're going...to face a situation where the appetite for investing in our countries is going to be excessive."‹