UPDATE 7-Caterpillar beats but margins worry investors

* Posts Q3 EPS $1.22 vs Street view $1.09

* Raises full-year forecast

* Says 2011 sales skewed toward lower-margin products

* Shares slip 1.2 pct; up nearly 40 pct this year
(Adds comments from CFO, year-to-date share price performance,
closing stock price)

By James B. Kelleher

CHICAGO, Oct 21 (BestGrowthStock) – Caterpillar Inc (CAT.N: )
reported stronger-than-expected quarterly earnings and said it
expected sales next year to snap back to pre-recession levels,
but concern about its margins helped send its shares lower.

The world’s largest maker of earth-moving equipment, whose
sales last year suffered their worst one-year decline since the
Great Depression, told investors that 2011 sales would be
skewed toward lower-margin machinery products.

A slowing of the incremental margin improvements seen in
recent quarters would add to the challenges the company already
faces of rising pension and retiree medical expenses, higher
research and development expenses related to new emissions
rules, and a higher tax rate.

“There’s a lot of risk to the bottom line,” said
Morningstar analyst Adam Fleck.

“There are a lot of uncertainties as far as developing
market growth goes,” Fleck said. “We’ve already seen China try
to stem their growth a little bit. Brazil’s raised interest
rates. And you’ve got political concerns here in the U.S.”

With less than two weeks to go before the Nov. 2
congressional elections in the United States, Caterpillar’s
earnings statement contained an uncharacteristically blunt
political plea from the company’s management.

Chief Executive Doug Oberhelman, who took the helm at the
end of the second quarter, said that while Caterpillar expected
positive economic growth in the United States, “the recovery is
weaker than we’ve seen historically, particularly given the
depth of the 2009 recession.”

“To drive economic growth, we encourage government policy
makers to advance pro-business initiatives and a growth
agenda,” Oberhelman said.

“In addition, they should avoid policy decisions that may
create trade tensions between the United States and other key
trading partners and avoid tax policy that puts U.S.
multinationals, like Caterpillar, at a competitive
disadvantage,” he said.

“BETTER POSITIONED TO PERFORM”

In an interview, Ed Rapp, the company’s chief financial
officer, acknowledged Caterpillar faced a number of
uncertainties in 2011, including the possible return of rising
material prices and supplier bottlenecks that crimped
profitability between 2006 and 2008.

But he said the investments that Caterpillar has made in
new plants in recent years, and the cost-cutting and
process-improvements it imposed during the slump, put it on
solid footing for the future.

“We’re much better positioned to perform in this upturn
than in the last,” Rapp told Reuters.

Caterpillar, which also makes diesel engines and gas
turbines, reported a third-quarter profit (Read more your timing to make a profit.) of $792 million, or
$1.22 a share, up 96 percent from $404 million, or 64 cents a
share, a year earlier. Sales rose 53 percent to $11.13
billion.

Analysts, on average, had expected the Peoria,
Illinois-based company to earn $1.09 share on sales of $10.65
billion, according to Thomson Reuters I/B/E/S. (For a graphic
on the earnings see http://r.reuters.com/kus59p )

Continuing growth in the developing world has been key to
improving sales, Caterpillar said.

Developing countries, including China, India and Indonesia,
accounted for about half the growth in machinery sales volume
during the quarter, as increased infrastructure construction
fueled demand for building equipment and higher commodity
prices lifted demand for mining machines, the company said.

“In addition, sales in developed countries have improved
substantially after deep declines in 2009. While demand has
increased, dealer new machine inventories and rental fleets
have remained relatively flat, and the age of rental fleets has
not improved, and that should be positive for us as we move
forward,” Oberhelman said in a statement.

Production of mining and related support equipment
increased more than 25 percent from the second quarter to the
third, and the company said previously announced investments in
new plants and equipment would allow it to continue ramping up
production next year.

MARGIN CONCERNS

As a percentage of sales, the company’s operating profit
nearly tripled to 10.7 percent of sales from 3.8 percent a year
ago.

But that kind of margin improvement may be more difficult
next year. During the investor call, Caterpillar executives
stressed the headwinds the company expects to face in 2011.

“We still have a pretty weak recovery going in the
developed world,” said Mike DeWalt, head of investor relations.
“It is improving, but those percentage increases are off pretty
low levels.”

What’s more, he said next year’s sales mix would be “more
heavily skewed” to lower-margin machines such as tractors and
loaders, rather than higher-margin engines like those made by
its Solar Turbines unit.

Machinery margins were 8.5 percent in the third quarter,
while engine margins were 16.3 percent.

In early trading Caterpillar shares rose to match a
two-year high of $81.18 reached last week, but they slid after
the company’s midday conference call with analysts and ended
down 1.2 percent at $78.89 on the New York Stock Exchange.

“Things are getting better, but guess what?” said Eli
Lustgarten, an analyst at Longbow Research, referring to much
higher than expected earnings this week from diversified
manufacturers Parker Hannifin Corp (PH.N: ) and Eaton Corp
(ETN.N: ). “It wasn’t the blowout that we saw for Eaton and
Parker.” [ID:nN20187719] [ID:nN19122244]
(Reporting by James B. Kelleher; editing by Lisa Von Ahn, Dave
Zimmerman and Tim Dobbyn)

UPDATE 7-Caterpillar beats but margins worry investors