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Economic Catnip for Caterpillar

Unless you've been sleeping under a rock for the last few years, you know that there's a debate going on about the economy in this country. Some point to low unemployment and big expansions in gross domestic product, and cheer. Others compare average wage growth to growth in corporate profits, and boo. Which side you support may greatly inform your view of Caterpillar's (NYSE: CAT  ) prospects in the year ahead.

Monday, the heavy equipment maker reported that first-quarter sales rose 12.6% to $9.4 billion, while per-stub earnings climbed 48.1% to $1.20. Both easily bested Street estimates. What's more, the company raised its earnings guidance for all of fiscal 2006 to $4.85 to $5.20 per share, holding sales guidance at $40 billion. Both are notable signs of optimism; according to Capital IQ, the consensus forecast comes in at $4.99 in EPS and $37.8 billion in current-year sales.

Moreover, every sector of Caterpillar's business improved in Q1. Machinery sales were up 13%. Engine sales were up 10%. And financial products sales -- the division that handles leasing, credit, and other such items -- were up 18%. Operating profit was also up in every division, including a 69% gain in machinery and a 61% gain in engines.

Management credits the boost to a fairly robust economy, which has led to increased demand for heavy equipment to handle construction, mining, and oil drilling. Caterpillar seems to believe that there's no slowdown in sight -- and given some of the collateral evidence floating around, management might be right. For example, Reuters reported today that copper prices continue to set new records, yet analysts following the sector believe we're at the beginning of an extended bull market for the metal. That, naturally, would lead to more mining, and more mining equipment.

Then there's oil. Just today, President George W. Bush said he would temporarily halt deposits to the U.S. Strategic Petroleum Reserve, and encouraged the oil industry to invest in new refineries. If the pressure tactics work, Caterpillar stands to sell more equipment. Even if they don't, the high price of oil may naturally encourage more exploration, which could create yet another windfall for Cat.

None of this should suggest that you ought to buy this stock; far from it. According to Yahoo! Finance, the overall construction industry trades for a forward P/E of roughly 15.3. That's roughly equal to Caterpillar, which trades for 14.9 times the midpoint of this year's revised earnings, and 15.6 times its projected five-year EPS. Both multiples seem perfectly reasonable to this Fool, especially given Caterpillar's growth. But I wouldn't say that makes the stock cheap -- whether or not this economy remains robust.

Take a swipe at related Foolishness:

Fool contributorTim Beyersdidn't own stock in any of the companies listed in this story at the time of publication. You can find out which stocks he owns by checking Tim's Foolprofile. The Motley Fool has an ironcladdisclosure policy.

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10/27/2016 4:00 PM
CAT $83.01 Down -1.12 -1.33%
Caterpillar CAPS Rating: ***