Caterpillar Forecasts Growth in Second Half on U.S., China

Caterpillar Inc., the largest maker of construction and mining equipment, said gains in its sales and profit this year will come in the second half as the world economy improves. Its shares rose.

The company forecast 2013 earnings of $7 to $9 a share on revenue of $60 billion to $68 billion, Peoria, Illinois-based Caterpillar said today in a statement. The average of analysts’ estimates compiled by Bloomberg was for profit of $8.54 a share on sales of $65.2 billion. Caterpillar predicted global economic growth of at least 2.5 percent this year. China will expand, albeit at a slower pace than in 2010 and 2011, the U.S. will show some improvement and Europe will still struggle, it said.

Caterpillar said that while the top end of the earnings and sales ranges may make 2013 another record year, first-quarter revenue may drop and profit may be “significantly lower” as dealers continue to order fewer machines to reduce inventory.

“Expectations were low and Caterpillar is executing on inventory and offered wide-ranging guidance that would limit future disappointments,” Lawrence T. De Maria, a New York-based analyst for William Blair & Co. who rates the shares buy, said today by phone. “As with most industrial companies, the guidance and results are more likely to be back-half-loaded because markets are recovering from 2012’s soft patch.”

Unsold Machines

Caterpillar Chairman and Chief Executive Officer Doug Oberhelman has expanded factories and announced $10.3 billion of deals since taking over as CEO in July 2010. The company is now dealing with a glut of unsold machines and manufacturing capacity and the discovery of false accounting at a company it bought in China that has forced Caterpillar to write off most of the deal’s value.

Fourth-quarter net income fell 55 percent to $697 million, or $1.04 a share, from $1.55 billion, or $2.32 a year earlier, the company said today. Profit excluding a $580 million writedown on its ERA Mining Machinery Ltd. unit in China and a $300 million tax benefit was $1.46 a share, missing the $1.70 average of 22 estimates. Sales fell 6.8 percent to $16.1 billion, matching the average of 14 estimates.

Caterpillar rose 2 percent to $97.45 in New York. The shares have declined 12 percent in the past year, the fourth-worst performer in the Dow Jones Industrial Average.

Siwei Probe

Traders covering short positions, or buying back shares below the price at which they borrowed the security, may have helped the stock today, said, Stephen Volkmann, a New York-based analyst for Jefferies & Co. While investors have been nervous, the quarter “is not a complete disaster,” Joel Tiss, a New York-based analyst for BMO Capital Markets who rates the shares a hold, said in a telephone interview.

“I definitely get the sense that a lot of investors have been waiting on the sidelines and the feeling is this is going to be the last of the bad news as we go through 2013,” Tiss said.

Caterpillar said it’s still investigating what it describes as a deliberate, multi-year coordinated accounting “misconduct” at Zhengzhou Siwei Mechanical & Electrical Manufacturing Co., part of ERA. Caterpillar, which acquired ERA in October for HK$6.15 billion ($793 million), says it removed senior managers at Siwei and put in place a new leadership team.

The discrepancy between Siwei’s physical inventory and its books was executed by several senior managers to inflate sales, understate costs, and over-report profit, Oberhelman said on a conference call with analysts. The episode has raised questions about Caterpillar’s strategy in China, the world’s largest construction equipment market and biggest producer of coal, he said.

Excess Inventories

“It’s a very important market now, and as we look to the future, we expect it to become even more significant,” Oberhelman said. “While the industries we serve in China are significant, it doesn’t mean there aren’t challenges.”

China’s economic growth rate will be close to 8.5 percent this year, Caterpillar said today. China’s expansion accelerated to 7.9 percent in the fourth quarter after slowing for seven straight quarters.

Caterpillar has suffered from excess inventories and manufacturing capacity in China. Excavator sales in the country in December fell for the 20th consecutive month and were down 35 percent last year, according to China Construction Machinery Business Online.

Caterpillar forecast today that world economic growth will be weak initially and improve as 2013 unfolds to beat last year’s growth of 2.3 percent.

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