Caterpillar: Rolling On

As such tech stocks as Dell and Intel roll over, old-economy stalwarts like Caterpillar continue to roll. The Peoria, Ill., heavy-equipment powerhouse on Friday announced another blow-out quarter: Earnings jumped 41%, to $1.52 per share, from the same period a year ago, and quarterly sales surged 13%, topping $10 billion for the first time.

Caterpillar is benefiting from strong global economic growth of about 5%. The company, a component of the Dow Jones industrial average, generates half of its sales outside North America. Robust global construction and infrastructure spending boosts demand for those yellow bulldozers, while high prices for commodities and energy stimulate orders for Caterpillar's mammoth mining trucks and oil-platform power generators. Residential construction in the U.S. is weakening, but demand for equipment used in commercial construction is more than compensating.

Unlike many U.S. manufacturers, Caterpillar enjoys pricing power: This is not General Motors or Ford competing against Toyota and Honda. Caterpillar is a global leader in many of its markets, such as earthmoving and mining trucks. Caterpillar Chairman and CEO Jim Owens noted that price increases accounted for more than one-third of the quarterly increase in revenues. Moreover, a weakening dollar should help the company compete against overseas rivals such as Japan's Komatsu.

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In the past, Caterpillar (symbol CAT) has been a highly cyclical company whose fortunes have been closely tied to growth in the U.S. economy, which will almost certainly start to cool in the second half of this year. David Raso, machinery analyst at Citigroup, thinks Caterpillar's strong balance sheet, increased exposure to overseas markets such as China and Latin America and more-diversified product line (power-generation equipment and truck engines are recent growth areas) can help reduce cyclical volatility.

The stock fell 73 cents on Friday, to $68.35. At that price, it sells for 12 times Raso's 2006 earnings forecast of $5.70 a share and ten times his 2007 projection of $6.57. Raso, who recommends buying the stock, has a price target of $93.

Andrew Tanzer is an editorial consultant and investment writer. After working as a journalist for 25 years at magazines that included Forbes and Kiplinger’s Personal Finance, he served as a senior research analyst and investment writer at a leading New York-based financial advisor. Andrew currently writes for several large hedge and mutual funds, private wealth advisors, and a major bank. He earned a BA in East Asian Studies from Wesleyan University, an MS in Journalism from the Columbia Graduate School of Journalism, and holds both CFA and CFP® designations.