For three quarters straight, heavy industry powerhouse Caterpillar (NYSE:CAT) has taken a wrecking ball to analysts' quarterly profits estimates. Will it demolish them once more when it reports Q3 2006 earnings results on Friday, or will the wrecking ball bounce back?

What analysts say:

  • Buy, sell, or waffle? Fifteen analysts follow Caterpillar, with seven rating it a buy and eight more a hold.
  • Revenues. On average, they expect to see revenues rise 18% for the quarter, to $9.9 billion.
  • Earnings. And 44% profit growth, to $1.35 per share.

What management says:
Do actions really speak louder than words? Then consider what it says about the state of the world economy, and Caterpillar's pricing power within that economy, when in September management announced a "pricing action" -- just as expensive as, if more polite than, a "price increase" -- of as much as 5% on machinery and 7% on engines, effective January 2007. The announcement promises further profits growth in the year to come, sure, but the fact that the company feels confident enough to raise prices down the road suggests that business is going pretty well today, too.

In other news, the company settled its licensing and supply disputes with rival and customer Navistar (NYSE:NAV) back in August. The settlement agreement will reduce third-quarter profits by $50 million after tax, but according to Cat, "Future incremental benefits from this expanded relationship are expected to more than offset the up-front loss."

What management does:
There's no two ways about it: Caterpillar has produced superb results over the last 18 months. Rolling gross, operating, and net margins have all grown strongly, with the result that the company now derives $0.02 more profit from each dollar -- in a growing pile of revenue dollars -- than it did 18 months ago.

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

23.6

23.5

24.0

24.8

25.9

26.7

Op.

9.1

9.4

10.0

10.6

11.6

12.5

Net

6.8

7.0

7.3

7.9

8.3

8.8
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Part of Caterpillar's success is derived from the fact that raw material costs are no longer growing at the rate they were in recent years. In the last six months, for example, non-financial sales grew 13%, while the cost of goods sold has grown just 6.5%. But the company isn't content to just sit on its raw material laurels -- it's also doing a fine job of controlling costs, adding extra basis points to the operating and net margin lines; selling, general, and administrative costs (SG&A) rose just 11% against the 13% sales rise year to date.

The same strong world economy that Caterpillar believes will permit it to raise prices next year could well send raw material costs upwards once again, thus squeezing gross margin. If that happens, though, the tight financial discipline management has shown with regard to SG&A should serve it well in cushioning the blow to operating and net profits.

Competitors:

  • Deere (NYSE:DE)
  • Kubota (NYSE:KUB)
  • CIT Group (NYSE:CIT)
  • Cummins (NYSE:CMI)
  • DaimlerChrysler (NYSE:DCX)

Keeping track of every company's news during earnings season is as hard as herding Cat, and we seemed to have missed this one last quarter. But we caught it in Q1. Read what we were looking for then, and what we got, in:

For more stocks with stellar numbers, take a peek at the companies our Stock Advisor newsletter has picked. A free report is now available.

Fool contributor Rich Smith does not own shares of any company named above.