Caterpillar Mines Big Profit

First-quarter earnings top forecasts; demand for mining, energy-related equipment booms.
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Updated from 7:54 a.m. EDT

Caterpillar's

(CAT) - Get Report

first-quarter earnings rose 45% as booming markets for mining- and energy-related equipment, as well as higher pricing, lifted results well past Wall Street's expectation.

The industrial bellwether said Monday that it earned $840 million, or $1.20 a share, in the quarter, compared with $581 million, or 81 cents a share, a year ago. Per-share earnings in the latest period tied the fourth quarter of 2005 as the highest in the company's history and were 15 cents a share above the Thomson First Call consensus estimate.

For all of 2006, Caterpillar raised its earnings estimate to $4.85 to $5.20 a share from the previous forecast of $4.65 to $5 a share. Analysts were projecting earnings of $4.99 a share for the year.

Shares of Caterpillar recently were up $1.20, or 1.5%, to $79.07. Eli Lustgarten, an analyst with Longbow Research, said the increased earnings guidance brought the company's outlook in line with analysts' expectations.

"Most of us were already forecasting earnings this year of at least $5," says Lustgarten.

Caterpillar's first-quarter sales rose 13% from a year ago to $9.39 billion, while sales of machinery and engines rose 12% to $8.74 billion, which was slightly above the Wall Street estimate of $8.70 billion. Caterpillar said that machinery sales rose 13%, engine sales grew 10%, and financial products sales increased 18% from a year ago.

"Underlying business conditions and demand for our products continue to be strong," the company said. "The fundamental strength of the industries we serve -- notably global mining, infrastructure construction, oil and gas, and energy -- continued to improve."

Caterpillar pegged full-year sales at $40 billion and said full-year engine and machinery sales should be $37.25 billion, which is slightly below analysts' estimate of $38.01 billion.

"Strong underlying fundamentals are in place, and we believe this is a business cycle that has staying power," the company said. "With our enterprise strategy and 2010 goals in place, Team Caterpillar is fully prepared to take advantage of the continued robust demand in the markets we serve."

Caterpillar said about half of its sales increase for the quarter reflected higher volume, while the rest of the increase resulted from higher pricing.

Shares of Caterpillar dropped precipitously in October, when the company reported margin pressure in its third-quarter results as higher commodity costs weighed down its profits. Shortly thereafter, the stock rebounded. It has gained about 37% so far in 2006.

The company said its operating costs rose in the first quarter, but the increase was more than offset by higher sales volume and pricing traction.

"The message from these results is that Caterpillar may not be able to perfectly time when it can pass through costs, but they can pass through these higher costs," says Lustgarten.

Caterpillar said that low interest rates and higher capital inflows led to economic growth in the U.S., which increased construction spending and helped business. Meanwhile, record price increases in metals, such as gold and silver, spurred mining activity, and soaring oil prices boosted activity in the energy sector. Housing starts also improved. The value of contracts for commercial construction surged, causing nonresidential building construction to strengthen, and funding as a result of the Federal Highway Bill increased new contracts and construction.

"These results just continue the trend of better-than-expected earnings, higher profitability and improved results we're seeing from most industrial companies this quarter," says Lustgarten. "There's a lot of strength coming out of industrial America right now, and it's spreading overseas."