Caterpillar, China, excavator--Caterpillar quick to react to swings in the economy

Jul 30, 2010 (Winston-Salem Journal - McClatchy-Tribune Information Services via COMTEX) -- Caterpillar Inc.'s appetite for growth is known worldwide, but it also has a well-earned reputation for slimming down its production and work force in a hurry when orders fall off.

The company has been on a remarkable run overall, going from almost $19 billion in revenues and nearly 60,000 employees in 1997 to a high of more than $51 billion in revenues and about 113,000 employees in 2008.

Driving the expansion have been the backhoes, bulldozers and other equipment that Caterpillar makes and that communities and countries need to improve infrastructure and grow their economies.

But Caterpillar also cut 20,000 full-time and contract jobs, or about 18 percent of its global work force, in January 2009 when customer demand shrank and orders were canceled. In response to the 1980-82 recession, it eliminated 19,000 blue-collar and 6,000 white-collar jobs -- about 25 percent of its work force.

That economic sensitivity and sensibility is why analysts consider Caterpillar a bellwether for the U.S. and global economies.

It's also why analysts say that Winston-Salem should feel confident that Caterpillar's planned $426 million, 510-employee manufacturing plant will remain a long-term presence, even if layoffs eventually happen.

Surging profits

Caterpillar tends to react to economic swings before many of its competitors -- and peers -- do.

That could be a good sign for the economy of the near future. On July 22, Caterpillar reported an increase in profit to $707 million in the second quarter -- about 80 percent of what it made for all of 2009.

"We've been highly focused on three things this year -- significantly increasing production in response to higher demand from our customers, particularly in developing economies; aggressively managing costs; and driving better cash flow," said Doug Oberhelman, the chief executive of Caterpillar.

Raising its earnings guidance for fiscal 2010 to a range of $3.15 to $3.85 a share, up from $2.50 to $3.25, led David Lee Smith, an analyst with The Motley Fool, a financial-services company, to say, "Clearly, Caterpillar is back.

"Its results just might be telling us that the economy is stronger than we thought," Smith said.

The main reason Caterpillar is expanding, even though economic uncertainty remains, is a lack of production capacity, said Stephen Volkmann, an analyst with Jefferies & Co., an investment bank.

"In the 2004-2008 economic cycle, Caterpillar felt it was capacity constrained," Volkmann said. "It doesn't want to be this time around."

In the second quarter alone, Caterpillar announced plans to:

Open an excavator plant in the United States and China.

Spend $820 million to buy Electro-Motive Diesel, which has the largest installed base of diesel-electric locomotives in the world.

Spend nearly $700 million related to its mining operations.

Add a plant in Brazil for small-wheel-loader and backhoe-loader manufacturing.

Even in a do-more-with-less business climate, Caterpillar has added 3,650 workers this year, 1,250 of which are in the United States.

Jim Owens, the recently retired chairman and chief executive of Caterpillar, said that 2009 served as an economic reality check.

"I would never say the recession was a good thing," Owens said in the company's 2009 annual report.

"But we learned to do more with less. We became more disciplined and committed to execution. And we developed an intense focus on cost. This will become the new norm and help us grow the right way without adding unnecessary costs."

That said, Caterpillar is positioned to grow again, Owens said.

"The world's need for infrastructure remains strong," he said. "Our strong global footprint and ability to export will help us take advantage of the recovery as it unfolds and gains strength."

Global growth

Analysts say that Caterpillar is particularly well-suited for the global economy, with 69 percent of its sales in 2009 occurring outside the United States.

"Many U.S. companies are still trying to figure out how to be global as the world gets flatter," said John Challenger, the chief executive of Challenger, Gray & Christmas, a consulting company in Chicago.

"They seem to be catching on to Caterpillar's approach of where it is investing significantly in plants in developing countries that need major infrastructure improvements to sustain growth and have the ability to finance it," Challenger said.

Although some analysts are concerned about the effect on Caterpillar as the federal stimulus program winds down, Jerry Revich, an analyst with Goldman Sachs, said he is "bullish on a turn in the construction cycle."

Caterpillar is also benefiting from sales related to "changes to emission standards for high-horsepower machinery that will come into effect in 2011," according to Stockcall.com.

It's inevitable that Caterpillar will be compared with the local Dell Inc. computer-assembly plant currently scheduled to close in January. Caterpillar is the largest local economic-development project since Dell made its decision to open a $110 million plant in Forsyth County that was supposed to employ up to 1,700 people. Because Dell assembled only desktop computers in the plant, and that market slumped, it never lived up to its production and staffing promise.

Volkmann said that unlike Dell, whose main products face fierce competition and pressure to bring innovation at lower prices, "the bulldozer and the excavator haven't changed much since World War II" outside of design and fuel options.

"They're not going to be replacing the bulldozer and excavator in 10 years with new technology, perhaps not in our lifetimes," he said.

Source: Trading Markets