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Caterpillar Plows Ahead

The industrial giant sees strong growth despite a bleaker outlook for the U.S. economy.
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Updated from 10:19 a.m. EDT

Shares of


(CAT) - Get Caterpillar Inc. Report

jumped Friday after the construction giant offered an upbeat outlook for sales and earnings, but the report was hardly a display of confidence in the U.S. economy.

The Dow component reported a 2.9% dip in first-quarter earnings that beat Wall Street's expectations, and it ratcheted up its guidance for 2007.

Meanwhile, the industrial bellwether predicted that the

Federal Reserve

will cut interest rates twice later in 2007 amid "below trend economic growth" in the U.S. The company's outlook on the U.S. has deteriorated amid a slowdown in housing construction, while strength from overseas markets is driving the business.

"Despite major headwinds in North America related to housing and the sharp drop in demand for on-highway truck engines, Team Caterpillar stepped up to deliver a solid first quarter," said the company in a press release.

On a conference call with analysts following the release, Caterpillar's group president Douglas Oberhelman emphasized the contrast between economic sluggishness at home and the roaring markets abroad.

"With a growing world outside the U.S. and a growing Caterpillar, we're very pleased with our position as we are able to sell and participate in markets around in the world in a way that we never have before," said Oberhelman.

Longbow Research analyst Eli Lustgarten says Caterpillar's exposure to a slowing U.S. economy is relatively small.

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"Caterpillar has always been big outside the U.S.," says Lustgarten. "It's a global infrastructure, global mining and a weak dollar investment, and that's a good place to be right now."

The Peoria, Ill., company made $816 million, or $1.23 a share, for the quarter ended March 31, compared with the year-ago $840 million, or $1.20 a share. Sales and revenue rose to $10.02 billion from $9.39 billion a year earlier. Machinery and engine sales -- which exclude revenue from Caterpillar's financial products business - rose 7% to $9.32 billion.

Analysts surveyed by Thomson Financial were looking for a $1.09-a-share profit on machinery and engine sales of $8.94 billion.

Caterpillar raised its 2007 earnings projection to $5.30 to $5.80 a share, up from $5.20 to $5.70 a share. It also boosted its revenue target for the year to a range of $42 billion to $44 billion, up from a previous outlook of $41.5 billion to $43.6 billion.

The new forecast should inspire confidence on Wall Street, where analysts, on average, had predicted 2007 earnings of $5.46 and machinery and engine sales of $39.87 billion, compared to the company's mid-range target of $40 billion.

Caterpillar said its first-quarter sales in North America dropped 9% due to weak demand for truck engines and a slowdown in the U.S. home construction business.

By contrast, sales in Europe, Africa and the Middle East jumped 26%. Latin American sales rose 6%, and Asia/Pacific revenue gained 25%.

"While we expected a sales decline in on-highway truck engines and U.S. housing-related markets, the continued strength in most of the other industries we serve and exceptional growth outside North America helped us deliver good results in a tough quarter," Caterpillar said.

The company's largest unit, machinery, recorded a 6% increase in revenue to $6.5 billion. Sales at its engine unit rose 7% to $2.82 billion, and financial products revenue increased 7% to $695 million.

Caterpillar predicted continued strength in commodity prices at "levels sufficient to encourage investment," and it forecast "solid 2007 economic and industry growth in most of the world outside North America."

Lustgarten points out that Caterpillar expects to increase its earnings to $8 to $10 a share by the end of this decade on single-digit top-line growth.

"As long as the global economies remain respectable, their earnings targets are quite achievable and the stock looks awfully attractive," he says. "The real debate on Caterpillar is whether the stock is going to $80, or whether it's going above $100."

Shares of Caterpillar recently were up $3.16, or 4.6%, to $71.78.