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Tuesday, November 07, 2006

Analyzing Caterpillar (CAT) & Notes From Annual Analyst Day

By Yaser Anwar CSC of Equity Investment Ideas

CAT held its annual analyst presentation on last Thursday and Friday. Although CAT's 07 guidance incorporates a growth rate slowdown for revenues, management continues to believe that the remainder of the decade should see a reacceleration of demand.

CAT noted that while North American residential and truck end markets look weak in 2007, most other global end markets remain strong. The majority of CAT's end markets and geographies are very strong and by CAT's own admission, the end markets that look to be weak in 2007, truck and residential construction in NA are relatively small overall parts of the company.

Overall, on the company’s longer-term outlook, CAT believes that growth from 2005-2010 will be above any of the three previous 5 year periods and that the Fed will take down rates again, which will spur higher demand in NA.

The services business is extremely positive and has a significant potential longer term to help CAT achieve its ultimate goal of becoming a more global, less cyclical and more profitable company but the diversification is clearly not yet helping balance overall cyclical exposures yet.

CAT reiterated its goal of reaching $50 billion plus of revenues by 2010, which implies a 6% CAGR off the company’s 2007 outlook, while the company expects EPS to grow faster at a CAGR of 15%-20%.

Management gave numerous reasons for its aggressive outlook. The global economy remains generally favorable, and the CAT’s 2007 outlook represents another year of record results.

CAT continues to see significant growth opportunities in product categories such as large engines (for oil & gas, marine and electric power applications) and mining equipment. At the same time, having acquired Progress Rail earlier this year, CAT is adding aggressively to its service capabilities, to reduce cyclicality.

As a result, even though CAT expects 07 to be a year of slower growth, as it trims dealer inventories and struggles with weaker North American residential and truck end markets, management expects that the rest of the decade should show resumed stronger growth.

CAT also expects global infrastructure investment to continue to increase, driving increased needs for new machines and components.

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