July 22 (Bloomberg) -- Caterpillar Inc., the world's largest maker of earthmoving equipment, said second-quarter profit climbed 34 percent, exceeding analysts' estimates, on demand for backhoes and mining tools in China and the Middle East.

Net income increased to a record $1.11 billion, or $1.74 a share, from $823 million, or $1.24, a year earlier, the Peoria, Illinois-based company said in a statement. Sales rose 20 percent to $13.6 billion, and Caterpillar raised its 2008 sales forecast.

Developing markets this year may grow more than six times as fast as in North America, where the U.S. may find it hard ``to avoid a recession,'' Chief Executive Officer Jim Owens said in the statement. He also cited ``softening'' in Japan and Western Europe. Roadwork lifted demand in China and the Middle East, and rising energy prices spurred mining-tool sales in Russia.

Caterpillar said it will raise prices worldwide by 5 percent to 7 percent as of January to cope with higher costs for steel, iron ore and crude oil. A bump of as much as 5 percent for machinery took effect this month. The company, which got 62 percent of its sales overseas last year, has room to raise prices in part because the dollar has declined 10 percent in a year against an index of six major currencies.

``The market had had some fears that Cat wouldn't have pricing power to be able to pass along the raw materials cost increases,'' Stephen Hoedt, an analyst with National City Corp., told Bloomberg Radio. Hoedt, based in Cleveland, helps manage $34 billion, including Caterpillar shares. ``We saw today that Cat, and then some, has the ability to pass that through.''

Shares

Caterpillar rose $1.75, or 2.4 percent, to $74.98 at 4:02 p.m. in New York Stock Exchange composite trading. The stock has gained 3.3 percent this year.

The earnings put the company ``on track to deliver our fifth straight year of record profits,'' Owens, 62, said. The average of 19 analyst estimates compiled by Bloomberg was for profit of $1.54 a share and sales of $12.3 billion.

The company doesn't provide quarterly forecasts. For the full-year, Caterpillar now predicts profit of $6 a share, within the range of $5.64 to $6.18 it projected in October. Sales may now reach $50 billion, above the prior forecast of $47.2 billion to $49.5 billion. Analysts, on average, project $6.03 a share and revenue of $48 billion.

``The guidance is disappointing, but probably conservative'' based on slowing North American and European growth, said Larry DeMaria, an analyst with Sterne Agee & Leach Inc. in New York. He recommends holding Caterpillar. ``Cat's ability to straddle emerging markets and developed economies gives it the ability to grow the top line in a challenging environment.''

Regional Sales

Machinery and engine sales grew around the globe, helped by a weak U.S. dollar and led by a 52 percent gain to $2.24 billion in the Asia Pacific region. China, one of the world's fastest growing economies, lifted sales on demand for wheel loaders and mining equipment. Caterpillar is building four plants in China to compete with Japanese rival Komatsu Ltd.

In the region that combines Europe, Africa and the Middle East, mining orders countered slowing construction demand in Europe, for growth of 22 percent to $4.44 billion. Latin American sales climbed 27 percent. Exports rose 30 percent in the quarter, Chief Financial Officer David Burritt said in an interview.

``We have a global portfolio that can compete with anyone,'' Burritt said. ``That growth is coming from the developing countries rather than the developed world is clearly one of the highlights for us.''

U.S. and Canada

Sales in the U.S. and Canada revenue rose 7.4 percent. Caterpillar won a $397.1 million contract during the quarter to supply dozers and armor kits to the U.S. Army.

Rising coal prices are bringing in more sales of mining shovels and trucks in North America, and Caterpillar forecasts revenue will be unchanged to up 3 percent this year. That's above a prior projection for sales to fall as much as 2 percent. Caterpillar has been hurt as slowing home construction and tighter lending restrictions in the U.S. cut sales of backhoes and excavators.

The North American economy may grow about 1 percent this year, the company said, above its April forecast for growth of 0.5 percent. Europe will slow to below 2 percent, while developing economies are forecast to grow 6.5 percent.

Owens expects the U.S. economy, including the housing market, to begin recovering next year, allowing the company to meet its 2010 sales forecast of $60 billion.

``We will get this problem behind us,'' Owens said in an interview with Bloomberg Television. ``It will probably take another six months to a year, but it will come back.''

Caterpillar, whose economic commentary in October contributed to a decline in the Standard & Poor's 500 Index, today lowered its projection for U.S. housing starts to 980,000 this year, the lowest since 1945.

The company sees ``no sign of a recovery in housing'' this year and predicts nonresidential building will fall 1 percent. New construction rose 9.1 percent to a 1.066 million pace in May, the U.S. Commerce Department said July 17.

To contact the reporter on this story: Courtney Dentch in New York at cdentch1@bloomberg.net.

Last Updated: July 22, 2008 16:11 EDT