Caterpillar Beats Street, Lifts 2009 Views

(Updated to include further detail from Caterpillar's earnings release; also updates the stock price.)

Caterpillar ( CAT) blew past Wall Street expectations and hiked its earnings guidance for the rest of the year Tuesday morning.

Indeed, the company's earnings release was marked with the kinds of sentiment that investors in a recession crave: anything at all that might suggest an oncoming turnaround. "There is still a great deal of economic uncertainty in the world," Caterpillar chief Jim Owens said in the release, "but we are seeing signs of stabilization that we hope will set the foundation for an eventual recovery."

Investors bid up the stock sharply on Tuesday, though the gains had moderated some by midday. Caterpillar shares were trading at $39.26, up 7% on volume of 34 million shares, approaching triple the daily average turnover.

Caterpillar, widely watched as a harbinger of the health of the world's economies, also chose to deliver some positive earnings guidance Tuesday.

The bellwether Peoria, Ill., bulldozer maker said it would "tighten" its prediction ranges for 2009's top and bottom lines. It expects to earn between $1.15 and $2.25 a share before charges for the full year -- above analysts' current consensus targets of $1.48. The company pegged 2009 revenue at $32 billion to $36 billion, in line with analysts' views of $34.9 billion, but far below 2008's $51.3 billion.

Still, the company was cautious. It attributed both its Street-beating second-quarter performance and its improved outlook more to cost-cutting and heightened efficiency than to any true recovery in the core business of selling huge machines to the likes of mine operators and construction companies.

Demand from those end-users was "in a tight band," to use the company's euphemism, all through the second quarter until June, when it showed "some improvement." But demand hasn't recovered nearly enough for Caterpillar's dealer inventories to do anything but continue to fall through the third quarter, the company said, which will likely be the weakest period for sales of the year.

To that end, the company said it will shut down some of its plants, likely in the third quarter. It wasn't more specific. To make other cost reductions, Caterpillar has already made layoffs (some 15,000 excised jobs since the second quarter of 2008), cut research and development outlays, ratcheted down production, and "significantly" reduced its inventory, all of which saved the company some $375 million in the second quarter.

Being a multinational bellwether, Caterpillar customarily gives a macro-economic outlook in its earnings releases, and in this regard, at least, the company attempted to temper enthusiasm -- perhaps to some degree contradicting the optimism inherent in its own earnings guidance.

"We expect the world economy to decline more than 2 percent this year, the worst year for growth in the postwar period," the company said, adding that even though some economic indicators point to a "moderating" recession, "we expect output will fall further in the third quarter before recovering slightly in the fourth quarter."

Compared with the year-earlier period, of course, Caterpillar's results were not good. Second-quarter earnings fell 66% to $443 million, or 72 cents a share (excluding the cost of layoffs) from the $1.1 billion, or $1.74 a share, it took in a year ago.

Analysts, however, were expecting second quarter per-share earnings of just 22 cents.

Quarterly revenue at Caterpillar dropped 41% to $7.9 billion from $13.6 billion a year ago. That represents a pretty severe miss of Wall Street's top line expectations, however. Analysts were looking for revenue in the quarter of nearly $8.9 billion.

Declining revenue was paced by Caterpillar's core machinery business, where sales fell 49% to $4.3 billion from a year ago.

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