Heavy equipment maker Caterpillar's soaring profit reflects strong demand in developing nations and offers reasons for optimism about the global economy and the prospects for other American manufacturers.
"They are a pretty good barometer," analyst Jeff Windau with Edward Jones said of Caterpillar Inc.
That's because Caterpillar sells its yellow-and-black mining and construction equipment around the world and can benefit from growth wherever it's occurring, while its reach also means the company's business reflects global economic trends.
Caterpillar predicts the world's economy as a whole will grow at a lukewarm rate of 3.5 percent in 2011, but developing regions will grow at nearly double that pace and continue buying equipment for mining and for upgrading their infrastructure.
Caterpillar, based in Peoria, Illinois, said Thursday that its fourth-quarter net income more than quadrupled to $968 million, or $1.47 per share, on $12.8 billion revenue. Those results beat analysts' expectations and easily topped the $232 million in net income, or 36 cents per share, that it earned a year earlier on $7.9 billion in revenue.
Chief Financial Officer Ed Rapp said increases in gross domestic product of roughly 6 percent in developing countries are leading naturally to rising demand for Caterpillar's products.
As China and India urbanize, they will need more and better infrastructure, and their people will demand a higher standard of living, which also feeds demand for products and commodities, Rapp said.
"The road to progress begins with the road. Period. You've got to have that basic infrastructure," Rapp said.
Caterpillar says it hired about 19,000 people in 2010, including 7,500 in the U.S. as it ramped up to meet demand. Those hires restored more than half the 37,000 full-time, contract and part-time jobs the company eliminated during the recession.
At the end of the year, the company had 104,490 employees, a little more than half working outside the United States.
The company plans to invest about $3 billion in capital projects in 2011, more than half in the United States. It is trying to boost production to reduce the wait for its mining equipment, now eight to 18 months.
"They do have a significant base in the U.S., so it does give us a window on what's happening here domestically," Windau said.
A hitch could come with inflation, which could hurt the bottom line for manufacturers because it makes their raw materials more expensive. But for Caterpillar, higher commodity costs also means more demand for mining equipment, which can help its bottom line.
Manufacturing remains a major source of U.S. economic activity, at 11.2 percent, down from a peak of 28.3 percent of U.S. economic activity in 1953, according to the Commerce Department.
Growth in manufacturing was a key force pulling the U.S. economy out of recession. Factories added 136,000 jobs last year, the first annual gain since 1997. And the U.S. manufacturing sector is the world's largest, producing 21 percent of all manufactured goods globally, according to the National Association of Manufacturers. Japan comes in at No. 2 with 13 percent, and China rounds at the top three with 12 percent, the trade group said.
Other U.S. manufacturers could benefit from the forces buoying Caterpillar. And General Electric Co. _ which makes products from dishwashers to wind turbines and derives about one-fourth of its profit from its financing business, GE Capital _ released an encouraging fourth-quarter report Jan. 21.
GE said its quarterly net income rose 52 percent from a year earlier, and CEO Jeff Immelt has said he expects GE's profit to be driven by industrial growth in China. The company earned $4.46 billion on revenue of $41.4 billion for the period that ended Dec. 31. Its quarterly revenue rose just 1 percent, but it was the first increase from a year earlier in nine quarters.
Eaton Corp., which makes hydraulic and transmission systems for the auto and space industries and military, said Thursday that its bookings rose 36 percent for the quarter that ended Dec. 31. Its quarterly net income rose 17 percent to $280 million on revenue of $3.7 billion, also up 17 percent.
The positive outlook for Caterpillar and other manufacturers depends on the economy continuing to recover. They would receive a major boost if the U.S. housing market rebounded. Conversely, Caterpillar said its results will be hurt if governments act prematurely to fight inflation by raising interest rates.
Caterpillar announced plans in 2010 to build three new facilities in the United States and five in other countries as it works to move production closer to where its equipment will be sold.
It said its sales in the developing world remain at or near record levels, though its sales in North America and Europe remain depressed.
"While sales rose, they are still far below previous highs with room to improve as economic growth and construction activity picks up. New machine sales in the U.S., for example, are still less than half their prior peak which was in 2006," said Mike DeWalt, the company's director of investor relations.
The company predicts a 2011 profit of nearly $6 per share on more than $50 billion in sales. Analysts are expecting $5.84 a share on $48.6 billion.
"I just think the company is well-positioned from a long-term growth perspective," Windau said.
For all of 2010 Caterpillar reported net income of $2.7 billion, or $4.15 per share, on revenue of $42.6 billion. That's considerably better than the previous year's $895 million net income, or $1.43 per share, on revenue of $32.4 billion.
Associated Press Writer Jeannine Aversa contributed to this report.