Caterpillar ( CAT) bulldozed fears on Wall Street that the slumping housing market would cause it to lower its forecast for 2007.

The Peoria, Ill., construction equipment maker said its fourth-quarter profits rose 4.3%, falling just short of Wall Street's expectations, but its revenue jumped by 14%, beating estimates.

Caterpillar also reiterated its previous forecast for 2007, calling for profits to be flat to up 10% and revenue to be flat to up 5%.

The forecast predicts a steep slowdown from the strong growth that Caterpillar has enjoyed in recent years due to weakness in the U.S. housing market and lower demand for truck engines, but the company expects gains from overseas markets and domestic mining and oil and gas markets to buoy its performance.

"The fact that they're not expecting declines, that's pretty good, especially since half their business are U.S.-based," says Morningstar analyst John Kearney. "Europe seems to be finally getting some traction now after seven years of doing nothing. International business is going to prop up Caterpillar as a whole."

In October, Caterpillar slashed its 2007 earnings forecast as part of its third-quarter report, sending its shares tumbling. Recent economic data showing continued weakness in the housing market rattled the stock market on Thursday and fueled speculation that Caterpillar would again ratchet back its expectations.

But with the speculation proved wrong, its shares were recently trading up $1.27, or 2.1%, to $60.90.

"Despite a sharp decline in two key North American industries -- on-highway truck engines and U.S. housing -- and an expected reduction in dealer inventories, we are projecting another record year in 2007," said Caterpillar CEO Jim Owens in a statement. "We expect to improve profit per share at a higher rate than sales and revenues, and that means a key focus in 2007 will be cost management."

On a conference call with analysts following its earnings release, Owens said economic conditions in the fourth quarter were stronger than he had expected, and he now believes the Federal Reserve won't lower rates in the first half of the year.

That said, Owens doesn't foresee further inflation pressures in 2007. He said the "best-case and most likely scenario" for the U.S. economy in 2007 is a soft landing, with the Fed starting to ease rates by 25 to 50 basis points in the back-half of the year.

"This could end up looking like the mid-1990's, when there was a slowdown that was then followed by another acceleration," Owens said.

For the fourth quarter, Caterpillar earned $882 million, or $1.32 a share, up from $846 million, or $1.20 a share, a year earlier. Sales rose to $11 billion, helped by a 13% increase in machinery sales, a 17% rise in engines sales and a 9% gain in sales of financial products.

Analysts polled by Thomson Financial were looking for a profit of $1.34 a share on revenue of $10.5 billion.

For 2007, the company expects to make $5.20 to $5.70 a share on revenue of $41.5 billion to $43.6 billion. Analysts forecast profit of $5.56 a share and revenue of $41 billion.

"My sense is that 2007 will be a mediocre year for Caterpillar, but we're only about halfway though the typical seven-to-eight-year business cycle for these guys," says Kearney. "Their growth spurt likely has a few more years to go."

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