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Caterpillar Caught in Happy Paradox

Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's Scott Eden joined NBR Tuesday (watch video and read transcript here) to preview Caterpillar's first-quarter earnings and discuss whether the heavy-equipment stocks show early signs of a recovery in the construction industry.

NEW YORK ( TheStreet) -- Caterpillar (CAT - Get Report) and other makers of big construction equipment are caught in a happy paradox.

As the Peoria, Ill., manufacturing bellwether gets set to report first-quarter results on Friday, demand for its bulldozers and earthmovers has strengthened, price hikes are sticking, and the time between orders and deliveries is getting longer, industry observers say. According a recent research note describing channel checks made by Wells Fargo analysts, some Caterpillar dealers say that the company is "selling anything it can manufacture."

And yet actual construction activity in North America remains tepid, and may in the short term even get worse. In February, non-residential construction spending declined even from 2010's depressed levels, according to the latest data compiled by the U.S. Census Bureau. Private commercial construction, meanwhile, continued to plunge by a wider margin, declining nearly 11% from February 2010.

So what gives?

It's true that the mining-equipment business is booming, which has lifted Caterpillar's prospects, along with the likes of mining specialists like Joy Global (JOYG) (as well as CAT's soon-to-be acquired Bucyrus (BUCY)).

But North American construction equipment, which now makes up about a third of Caterpillar's total sales, according to R. W. Baird analyst Robert McCarthy, appears to be going swimmingly as well. That's because the nation's heavy-equipment rental outlets had reduced their fleets during the downturn to such a degree that they're now ordering enough new machines to keep factories humming.

Word on the Street

"What Caterpillar is going through, like everyone else, is a wholesale redistribution of inventory to dealers," says Charles Yengst, a forecasting consultant for the heavy-equipment industry who seeks a ground-level view of the business by talking with dealers and end users.

To be sure, manufacturers still haven't boosted their factories' operating capacities to full throttle. But there's enough pent-up demand from rental fleets and dealerships, who are seeking to replace aging stock, that profits for the big boys especially (read: Caterpillar and Deere (DE - Get Report)) will show strong year-over-year comparisons in the first and second quarters, analysts say.

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