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Caterpillar Projecting Strong Earnings for 2018 on Rising Economic Tide

Jan. 25, 2018
The company is projecting growth in its construction and mining-equipment businesses, with increased sales in China and expansion in North America.

If you want more evidence of a broadening expansion in the global economy, look no further than Caterpillar Inc.

Surging Chinese demand and an improving U.S. economy have lifted sales of Caterpillar’s signature yellow mining and construction machines. Now, with the pace of growth quickening in Latin America and Europe, the company is projecting higher earnings for 2018 than analysts estimated.

The outlook from Caterpillar, considered an economic bellwether, comes as industries from manufacturing to services report increased sales and orders that have fueled record equity prices and buoyed investor expectations for this year. This week, the International Monetary Fund raised its estimate for 2018 global growth to the fastest in seven years.

“Caterpillar’s results showed strength across the board in nearly every industry for the first time, which indicated coordinated and synchronized macroeconomic growth,” Larry De Maria, an analyst at William Blair & Co., said in an interview. “It’s a good harbinger for overall economic activity.”

The company’s stock fell on Jan. 25 as President Donald Trump’s protectionist agenda fueled worries about the future of global trade, sparking an early drop in broader market indexes, De Maria said.

Raising Estimates

Deerfield, Ill.-based Caterpillar on Jan. 25 projected growth in its construction and mining-equipment businesses, forecasting increased sales in China and expansion in North America, even without a U.S. infrastructure bill. It forecast 2018 earnings of $8.25 to $9.25 a share. The $8.75 midpoint of that range surpassed the $8.63 average of estimates compiled by Bloomberg. Sales and earnings in the fourth quarter of 2017 also topped expectations.

Estimates for Caterpillar earnings had risen 16% the past three months, the most in the Dow Jones Industrial Average, amid signs of improving demand across the globe. Caterpillar, which in December capped the biggest annual gain in its shares since 2003, raised its 2017 revenue projections three times last year.

Caterpillar reported Wednesday that retail machine sales in the three months ended December rose by the most since 2011, adding to evidence of momentum. Sales in the Latin America resource-industries unit more than doubled. The company posted double-digit percentage sales declines every month in the two years through 2016.

“After four challenging years, many key markets improved in 2017,” Caterpillar CEO Jim Umpleby said on Jan. 25.

The company’s stock climbed 26% in the fourth quarter, and 70% last year. The shares were the second-best performer in the Dow Jones Industrial Average last quarter.

“The stock is a victim of elevated near-term expectations,” said Matt Arnold, an analyst at Edward Jones & Co. “Expectations going into this quarterly report were quite high in terms of short-term investors expecting CAT to handily beat consensus earnings estimates and provide a strong outlook to the year.”

By Joe Deaux

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