Caterpillar Falls After Citing Higher Pension Costs

Caterpillar Inc., the world’s largest maker of construction and mining equipment, fell in New York trading after saying it expects cost “headwinds” in 2011.

Caterpillar predicted higher expenses for pensions, retiree health benefits, research and development and tax, the Peoria, Illinois-based company said in a statement today.

Sales will “approach” $50 billion next year, from $41 billion to $42 billion in 2010. Caterpillar said it has more work to do before providing 2011 earnings guidance.

Doug Oberhelman, who succeeded Jim Owens on July 1 as chief executive officer, is targeting $8 to $10 a share in profit on sales of as much as $60 billion in 2012. He’s aiming to pull 25 cents of profit from every new dollar of sales.

“People are worried about the incremental margin in 2011” after the company’s comments on costs, said Stephen Volkmann, an analyst for Jefferies & Co. in New York who has a “buy” rating on the shares.

Caterpillar fell 99 cents, or 1.2 percent, to $78.89 at 4:15 p.m. in New York Stock Exchange composite trading.

“Some investors may have underestimated the impact of rising pension, healthcare, and commodity costs would have on the outlook,” Joel Levington, a managing director of corporate credit at Brookfield Investment Management Inc. in New York, said in an e-mail. Rising metals prices may increase costs for Caterpillar, he said.

2010 Forecast

The company raised its full-year earnings forecast and posted third-quarter profit that topped analysts’ estimates.

Net Income rose 96 percent to $792 million, or $1.22 a share, from $404 million, or 64 cents, a year earlier. That beat the $1.09-a-share average of 21 analysts’ estimates compiled by Bloomberg. Sales climbed 53 percent to $11.1 billion from $7.3 billion.

Profit for 2010 will be $3.80 to $4 a share, up from a July forecast of $3.15 to $3.85, Caterpillar said. The average of 23 analysts’ estimates compiled by Bloomberg was for $3.76 a share.

The shares also may have fallen because investors were looking for Caterpillar to beat the average of analysts’ estimates by a greater margin, Volkmann said.

“The beat was a little weak and expectations were high,” he said.

The company’s 2010 revenue forecast was raised from a previous outlook of $39 billion to $42 billion. Caterpillar has announced plans in the past five months to build factories in Brazil and China, where economic growth is outpacing the U.S.

Emerging Markets

“It’s truly a story of emerging markets,” Brian Rayle, a Cleveland-based analyst at Northcoast Research who has a “neutral” rating on the shares, said in an interview. “Demand looks like it’s better in this year and 2011.”

Sales from Caterpillar’s machines business, which makes excavators, bulldozers, haul trucks and loaders, rose 84 percent to $7.2 billion in the quarter. Engine sales climbed 21 percent to $3.25 billion while financial-product revenue fell 5 percent to $682 million.

“The numbers are better across the board, in machinery and engines,” Eli Lustgarten, an analyst for Longbow Research in Independence, Ohio, who has a “neutral” rating on the shares, said in an interview. “It’s a solid beat.”

Global employment was 102,336 at the end of the quarter, including about 2,300 full-time workers, following the acquisition of Electro-Motive Diesel. The company added 6,200 full-time employees this year, primarily because of production increases, and about 9,000 part-time, agency and temporary workers.

Growth Prediction

Caterpillar cut about 19,000 full-time jobs and 18,000 part-time and temporary workers from late 2008 through the end of last year after demand plunged during the recession.

The company today forecast world economic growth in 2010 and next year will be more than 3.5 percent. The U.S. may expand 2.5 percent this year and 3 percent next year while developing countries may grow about 7 percent in 2010 and 6.5 percent in 2011, the company said. Growth in China may moderate in 2011 to about 9.5 percent from 10.5 percent, it said.

Caterpillar said it expects the U.S. Federal Reserve Bank will increase liquidity in the fourth quarter and the European Central Bank will hold its current policy through the yearend even though turmoil in government debt markets could result in additional bond purchases.

To contact the reporter on this story: Shruti Date Singh at ssingh28@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net

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