Caterpillar Recovery Draws Worrywarts

(Caterpillar story updated with further commentary on the company's incremental margins.)

PEORIA, Ill. (TheStreet) -- Caterpillar(CAT) appeared to confirm Thursday that the heretofore recession-bound bellwether had turned the corner, but some investors and company watchers remain worried about whether the company can fully take advantage of an upturn as it strives to ramp-up manufacturing plants it had idled during the downturn.

In reporting second-quarter results that bulldozed through Wall Street forecasts, Caterpillar (as expected) lifted its earnings-per-share target range for 2010 and tweaked its revenue projections for the same period. And a bevy of data appeared to offer more detailed evidence of Caterpillar's return. Machine sales, for instance, the industrial bellwether's core rolling yellow heavy equipment, jumped 55% year-over-year in the company's core region, North America (a number helped by extremely easy comparisons with an epochally bad year-earlier period for Caterpillar.)

The news gave the company's stock a modest boost in Thursday trading. More importantly, combined with strong quarterly results from other corporate giants -- AT&T(T), UPS(UPS) and 3M(MMM) chief among them -- CAT's sanguine outlook lit a fire under U.S. equities, with the Dow Jones Industrial Average surging by more than 200 points.

But you wouldn't quite describe the company's conference call with analysts Thursday morning as celebratory. At issue for some sell siders was Caterpillar's "incremental margins," or the profit the company takes from each additional dollar of revenue it turns. Essentially, the figure is a measure of how well the company is executing as it brings idled capacity online and speeds the process of manufacture to meet rising customer demand. (That demand has come largely from the mining industry; construction, long Caterpillar's bread-and-butter, remains in the doldrums.)

In the past, Caterpillar has struggled with this -- indeed, the company was highly criticized for just such production inefficiencies at the outset of the last boom, when it went through prodigious growth, and growing pains.

Company executives are hyper-aware of the issue; they've spent the last few years attempting to retool Caterpillar's production systems, along the lines of the so-called "lean manufacturing" methods pioneered long ago by Toyota(TM), so that it might be better prepared to take advantage of an upcycle. The company also instituted something called a "lane-one strategy," a new sales process by which Caterpillar aims to speed the delivery of equipment sporting its most popular features, pushing those kinds of machines into customers hands without delays.

(Rival Deere(DE) is often held up as a teacher's-pet example of manufacturing prowess, in contrast to Caterpillar's sometime clumsiness.)