Caterpillar's Polarizing Outlook

Caterpillar's outlook looks super-optimistic to some and downright conservative to others.
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PEORIA, Ill. (TheStreet) -- Caterpillar (CAT) - Get Report shares weren't going to do anything Monday except continue their ascent -- the stock has moved higher by 21% since the beginning of the year and more than doubled since last July, a stock-price rally that has encapsulated widespread investor belief in a strengthening economy both in the U.S. and abroad.

The heavy-equipment bellwether surprised Wall Street Monday morning by lifting its sales and earnings guidance for 2010 -- moving its targets above a previous forecast that some observers had already called

overly optimistic

and others

overly conservative

.

Caterpillar had been projecting year-over-year revenue growth of 10% to 25% for 2010. Its new expectation? That sales will jump by 17% on the low end and 30% on the optimistic end. If accurate, that would put the company's top line somewhere between $38 billion and $42 billion for 2010.

Caterpillar attributed the improved outlook largely to a humming business in Latin America and Asia, not to mention a boomlet in the mining industry worldwide, which has benefited from elevated commodities prices for almost a year now -- especially

iron ore

and

copper

. Indeed, just last week,

Freeport McMoRan

(FCX) - Get Report

announced better-than-expected quarterly results and detailed plans to

restart mines that it had shuttered in the U.S.

as it looks to take advantage of an improving economy.

But, of course, skeptics remain. One of them, Charles Yengst, is a heavy-equipment forecasting consultant who seeks a ground-level view of Caterpillar's business by talking with dealers and end users. Yengst noted that the roaring economies in the developing world will doubtless boost Caterpillar's results in 2010. But he has a hard time seeing how that alone will give the company enough business to meet its revised growth targets.

In other words, according to Yengst, Caterpillar will need to see an uptick in real demand for construction gear in the U.S. and Europe -- markets that remain moribund and flooded with older equipment that a penny-pinching customer base is more than happy to buy, should they require replacement machinery. He believes 10% to 15% growth on the top line is more realistic.

"People aren't trampling to get to the dealership" to buy brand new Caterpillar equipment, said Yengst, who just returned from Bauma, a heavy-machinery trade show in Munich, where he rubbed shoulders with executives of manufacturing companies and their suppliers from around the world.

In talking with these supply-chain experts, Yengst said, the consensus was that Caterpillar and other OEMs such as

Deere

(DE) - Get Report

"are rebuilding inventory and just hoping that demand picks up in six months or a year, to a point where the inventory matches up with demand. If it doesn't, they'll have to back off."

Others were skeptical as well, but for vastly different reasons. For a true gauge of the company's growth projections for 2010, the $3.9 billion in inventory reductions that Caterpillar's dealers underwent last year need to be added back, said Alex Blanton, an analyst with Ingalls & Snyder. That's because dealer inventories are expected to remain flat in 2010.

All of which means that the company's newly raised top-line outlook is targeting sales growth of between 5% and 16% for the year, which looks conservative, Blanton said.

"If they don't hit the high end" of that range, Blanton said, "either the emerging markets are disappointing or the U.S. or Europe is disappointing. As I see it, given the current forecasts for the worldwide economy, it's hard for me to see how they wouldn't hit the high end -- because the high end isn't that high. It's off a depressed base."

Still, he said, the stock's explosive run since last year means that investors have priced in much of the good news. For Blanton, a bet on Caterpillar now is a market call. Further upside in the company's stock depends on the outlook for 2011, which is much less certain, the analyst said, given the inevitable rise in interest rates and the possibility that China has entered a bubble.

Monday afternoon, shares of Caterpillar were changing hands at $72.02, up $3.24, or 4.7%, after earlier going as high as $72.83. Volume reached nearly 15 million shares, compared with average daily turnover of about 9 million.

-- Reported by Scott Eden in New York

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Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.