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Big Yellow posts record third quarter sales and profits

Posted October 18, 2007 11:00 pm

Paul Gordon

Sales outside the United States more than offset a falling U.S. economy and paced Caterpillar Inc. to record third quarter sales and profits, the company said Friday.

But other news in the third quarter report - including a lowered outlook for all of 2007, a preliminary outlook for 2008 that falls short of expectations, and warnings the U.S. economy is getting weaker - caused Caterpillar stock to fall sharply in trading on the New York Stock Exchange.

Caterpillar stock closed Friday at $73.40 a share, down $4.26 - or 5.49 percent - as more than 16 million shares were traded. That's about 2½ times the daily average.

Caterpillar announced a profit of $927 million on sales and revenues of $11.44 billion, the latter eclipsing sales and revenues of the third quarter 2006 by $925 million, the company said in a news release.

The third quarter profit of $1.40 a share was also a record - and the second-highest quarterly profit in company history - topping last year's mark of $1.14 a share as profit increased by $158 million, or 23 percent.

However, the profit fell short of projections. Analysts expected a profit of $1.43 a share, according to Thomson Financial.

Caterpillar lowered its profit-per-share outlook for the year from a range of $5.30 to $5.80 a share down to $5.20 to $5.60 a share. That's still within expectations of analysts, who project 2007 earnings of $5.44 a share.

Caterpillar also presented a preliminary outlook for 2008 that calls for sales and revenues to increase 5 percent to 10 percent, with a similar bump in profit per share. While that would mean the sixth consecutive year of record revenues and profits, the expected profit of $5.67 to $6.21 a share would be less than analyst expectations of $6.27 a share for 2008.

Caterpillar said higher operating costs again helped keep profit lower than it could have been, partially offsetting gains in sales volume and improved price realization. The costs are associated with implementation of the company's new operating system that aims to improve delivery times while also improving safety and quality.

Another factor was the weak dollar, which the company said took $60 million - or 6 cents a share - from the bottom line.

Still, sales and revenues for the quarter beat Wall Street expectations of $11.17 billion.

"These results clearly demonstrate our global reach and the stability and strength of our growing integrated service businesses. We delivered strong returns for our stockholders despite continuing severe weakness in key U.S. markets," said Chairman Jim Owens in a news release.

"With our extensive product offering and the continuing strength in most end markets, we were able to more than offset the impact of the dramatic drop in on-highway truck engines and report record operating profit for engines."

Analysts contacted said they didn't have any problems with the strong sales, particularly with Caterpillar's ability to overcome weak domestic sales with strong overseas sales. But they believe investors were disappointed by several factors.

"The preliminary outlook for 2008 is below what we were expecting. Investors revalued Caterpillar accordingly and I think the markets reacted in surprisingly rational fashion. That's not always the case," said Mark Koznarek of Cleveland Research.

He also hit on the continued problems Caterpillar is having with costs. "They keep promising they will contain those costs, that we'll see real progress next quarter, then it never arrives. There is a real credibility issue developing here."

John Kearney of Morningstar said he wasn't shocked by the report and that the trends - weakness in North America, continued growth abroad - were what he expected.

He pinned investors' reaction to the fact costs again hurt profit.

"There was less profit than what was expected given the growth in revenues," he said.

Kearney also noted the preliminary 2008 outlook was lower than expected if Caterpillar expects to reach earnings of $8 to $10 a share and $50 million in sales and revenues by 2010, which Owens reiterated during a conference call with analysts.

"That leaves them an awful lot of work to do on the back end," Kearney said.

In a meeting with reporters later Friday, Dave Burritt, chief financial officer, and Mike DeWalt, director of investor relations, defended the 2010 prediction.

"The $50 million is still in sight, even though our U.S. markets are off," Burritt said.

DeWalt said while the domestic markets are weak now and likely will be in 2008, "I don't think anybody expects there will be a four-year decline."

During the conference call, analysts hit hard on the cost-control problems. The company said it is taking longer than expected to implement its new production systems and added it was hit with unforeseen increases in material costs.

Implementation of the new operating systems "is not going as fast as most of you would like, but we're pleased with the progress," said Owens.

Group President Doug Oberhelman said the new system is replacing one that has been in place 25 years.

"It is a process, it's a culture change, and it takes time. We're probably running behind, but we are seeing progress," he said.

Highlights of the third quarter report, which can be accessed on Caterpillar's Web site at www.cat.com, included:

-- Machinery sales grew 35 percent over third quarter 2006 despite a 12 percent decline in North America. The Europe-Africa-Middle East region had 43 percent growth.

-- Engine sales were up 26 percent despite a 16 percent decline in North America, largely due to a large drop in on-highway truck engines. But there was growth in engines and machines in the electrical power, mining and oil and gas exploration sectors.

Paul Gordon can be reached at (309) 686-3288 or pgordon@pjstar.com.

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