Industrials post solid profits, cost cuts key

By Scott Malone and James B. Kelleher

BOSTON/CHICAGO (BestGrowthStock) – Several big U.S. industrial companies reported better-than-expected profits on Wednesday, as last year’s hefty cost-cutting programs began to pay off and demand for some heavy equipment showed signs of recovering.

But the initial 2010 outlooks provided by some of the companies, including Caterpillar Inc (CAT.N: ) and Illinois Tool Works Inc (ITW.N: ), fell short of the hopes that many investors had factored into their stock prices, sending their shares lower in early trading.

The unexpectedly guarded view from Caterpillar, a closely WATCHED bellwether and component of the Dow Jones industrial average, helped pull the lower market lower.

Caterpillar said it now expects to report a profit of $2.50 a share on sales of $35.6 billion to $40.5 billion as the rebound from the recent global downturn favors some of its markets and products over others.

That was below the $2.71 a share profit analysts expected, according to Thomson Reuters I/B/E/S — and well below the $3 a share “whisper number” that Eli Lustgarten, an analyst at Longbow Securities, said was circulating among some investors ahead of the forecast.

Caterpillar said it expects the world economy to grow more than 3 percent in 2010, led by developing economies like China, which it said would grow more than 10 percent.

But it warned that the United States, the world’s largest economy, would grow just 3.5 percent, well below levels seen in past recoveries.

Caterpillar said a continued decline in nonresidential building construction, and delays in passing a highway bill, “likely will cause highway contractors to remain cautious about purchasing equipment.”

That is bad news for Caterpillar and other makers of construction equipment, which are already grappling with a precipitous drop in sales to residential builders because of the collapse of real estate prices in North America and Europe.

Shares of Caterpillar’s rivals in the space, including Terex Corp (TEX.N: ) and Deere & Co (DE.N: ) both fell.

In addition, Caterpillar warned that sales of its higher margin products, including turbines and large reciprocating engines, would fall in 2010. It said the “impact of improving demand for mining equipment is positive, but not enough to offset the significant negative factors.”

The disappointing forecast came as Caterpillar reported a fourth-quarter net profit of $232 million, or 36 cents a share, down from $661 million, or $1.08 a share, a year earlier.

Stripping out costs associated with the company’s restructuring, which involved the elimination of nearly 25,000 jobs worldwide, Caterpillar said it earned 41 cents a share.

On that basis, analysts, on average, expected the Peoria, Illinois-based company to report a profit of 28 cents a share, on sales of $8.11 billion, according to Thomson Reuters


Diversified manufacturer Illinois Tool Works, which makes tool, packaging, welding and food service equipment also disappointed the market with its initial outlook for 2010, sending its shares down as much as 6 percent.

The news from Rockwell Automation Inc (ROK.N: ), which makes systems that help factories run more smoothly, was more to the market’s liking as the company reported that sales of its highly profitable computer control systems were better than expected.

The results sent its shares up more than 10 percent, to their highest level since June 2008.

“Some of the cost benefit is definitely flowing into the numbers,” said Richard Eastman, senior analyst at Robert W. Baird & Co., who follows Rockwell. “But you also have to credit sales. Sales are running a bit ahead of expectations.”

United Technologies Corp (UTX.N: ) and Tyco Electronics Ltd (TEL.N: ) also reported profit that topped consensus.

The solid results for the most recent quarter continue a trend. Over the past week, General Electric Co (GE.N: ), Parker-Hannifin (PH.N: ) and Eaton Corp (ETN.N: ) also reported better-than-expected profit.


While the United States’ recovery from its worst recession since the 1930s remains uncertain, manufacturing executives said their prospects in Asia looked stronger.

Milwaukee-based Rockwell, which raised its full-year forecast to $2 to $2.40 per share, up from a prior forecast of $1.25 to $1.75 a share, cited Asia’s promise.

“We saw strong growth in emerging Asia,” said Keith Nosbusch, Rockwell’s CEO.

United Tech CEO Louis Chenevert was similarly bullish on Asian prospects.

“Year-over-year order rates have remained stable, although at low levels, and we saw increases in some Asian economies, notably China,” said the head of the world’s largest maker of elevators and air-conditioners, who confirmed the company’s forecast for full-year earnings of $4.40 to $4.65 per share.

The Standard & Poor’s capital goods industry index (.GSPIC: ) has risen about 24 percent over the past six months, twice the 12 percent growth of the broader S&P 500 (.SPX: ).

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(Additional reporting by Chris Kaufman and Nick Zieminski in New York, editing by Dave Zimmerman and Gunna Dickson)

Industrials post solid profits, cost cuts key