Costs Worsen Cat's Wounds

Cat maintained its 2007 forecast for sales around $44 billion, but the company now believes it will earn $5.20 to $5.60 a share. While that's up from $5.17 in 2006, it's below the previous target of $5.30 to $5.80. Analysts had forecast earnings of $5.44 a share, according to Thomson Financial.

The company said its sales outlook stems from increased volume overseas, price realization and favorable currency impacts. The weaker profit view, meanwhile, comes from rising core operating costs and a higher tax rate.

Shares of Caterpillar recently were down $2.81, or 3.6%, to $74.85.

For next year, Cat expects a 5% to 10% increase in sales and earnings that are 5% to 15% above the midpoint of this year's projected range. Meanwhile, the company predicts that the U.S. economic growth rate will drop in 2008 to 1.5%, even slower than the 2% projected for 2007.

"The weak economy will encourage the [Federal Reserve] to reduce interest rates further," Cat said. "Our outlook reflects U.S. housing, nonresidential contracting and quarrying declining further. For the major U.S. machinery end markets, only coal mining shows a reasonable possibility of improvement from 2007."

On a conference call with analysts, Caterpillar Chairman and Chief Executive Jim Owens said the U.S. housing market is experiencing its worst conditions since World War II.