UPDATE 4-China concerns trump Caterpillar profit, outlook

* Q1 EPS $2.37 vs $2.13 Wall Street forecast
* Sales up 23 pct at $16 bln vs $16.2 bln Wall Street view
* Lifts FY 2012 EPS to $9.50 from $9.25
* Shares down 5 pct on China concerns, modest outlook

By John D. Stoll
April 25 (Reuters) - Concerns about a slowdown in China and
other key emerging markets overshadowed Caterpillar Inc's
better-than-expected rise in first-quarter profit,
sending its shares down 5 percent during Wednesday's trading
session.
Caterpillar continued a string of strong quarterly
performances, posting a 29 percent profit increase by relying on
its growing mining business and sales to U.S. buyers looking to
replace aging equipment. The world's largest maker of
construction machinery also increased its profit guidance for
the year.
But investors latched on to the company's slowdown in China
and Brazil, and continued concern about Europe. This only stoked
Wall Street's existing fears about emerging markets during the
current earnings season.
Doubts about China were coupled with additional concern over
the way the company went about lifting its full-year forecast.
"The quarter was good, but guidance was only increased by
the amount of the beat and revenue guidance was unchanged,"
Jefferies & Co equities analyst Stephen Volkmann said in a note
to investors. He said the company's growing inventory levels
"may raise some investor concerns."
In recent quarters, Caterpillar has been a leading player in
a U.S. industrial sector that has shrugged off economic fears by
posting record profits and providing an optimistic outlook.
While emerging markets have provided an increasing slice of
sales growth, an improving U.S. economy is increasingly
underpinning the performance of these companies.
"We just continue to see throughout this quarter that North
America continues to be strong for these industrial companies,
and that is definitely true for Caterpillar," Jeff Windau, an
analyst with Edward Jones, said.
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CHINA PLAN
Caterpillar has been investing heavily in capacity and is
aggressively chasing sales in that market, and it now has too
much inventory in the China.
Executives moved to allay concerns by addressing the issue
during its first-quarter conference call with analysts. Mike
DeWalt, director of Caterpillar investor relations, said the
China market -- while important -- does not have a massive
impact on bottom line at this point. And the company is
convinced China's government has a solid long-term growth plan.
"It's an important market particularly for the future,"
DeWalt said. As for its influence on Caterpillar's results:
"It's just not as significant as many people believe."
He also said that pricing is holding up despite concerns
that there is too much production capacity in the industry.
Still, the company is taking action to mitigate any
short-term concerns.
DeWalt said the company has "too many finished goods on the
ground." As a result, Caterpillar will divert about 20 percent
of its China excavator production to other countries where
demand is much stronger for that equipment.
The company also is willing to tweak its growth blueprint
for the country. While Caterpillar is not cancelling any of its
expansion plans, it could slow the timing of those projects if
the need arises, DeWalt said.

'WE REMAIN ON TRACK'
While traditional construction markets are weak, North
American customers are scrambling to replace aging machinery,
including excavators and bulldozers. This is taking place as
construction companies work to keep up with a backlog of
expansion projects in the United States and Canada, including a
relative boom in the energy sector.
Many of these construction companies did not buy new
machinery from 2008 through 2010 due to credit constraints and a
lack of business. Now, they are rushing into the market, helping
drive Caterpillar's backlog to $30.7 billion, or $10 billion
more than it was a year ago.
Another factor driving Caterpillar is growing strength in
the mining business, which was bolstered by its 2011 acquisition
of Wisconsin-based Bucyrus. The company's power equipment sales,
including locomotives and engines needed for gas and oil
companies, are also running at a solid clip.
"We remain on track ... at a time when U.S. construction
activity remains depressed and economies in Europe, China and
Brazil have slowed," Caterpillar Chief Executive Doug Oberhelman
said in a press release. The slowing in China and Brazil comes
as those countries "took steps in 2011 to slow their economies
and bring inflation under control," Oberhelman said.
Brazil and China are expected to ease their policies.
"Although it's tough to predict the exact timing, we expect
positive economic growth moving forward," Oberhelman said.
The company will need its prediction to hold as it steadily
installs and expands global production capacity, leading to a
brisk hiring pace and increased costs related to lifting
production and headcount. In addition, material costs --
including steel prices -- continue to rise.

MARGIN STRENGTH
Analysts were encouraged by the company's incremental profit
margins during the quarter, which were robust even as the
company only modestly raised prices.
"We thought the quality was good, especially in margins that
continue to improve without relying on the pricing lever," Rob
Wertheimer, a Vertical Research Partners analyst, said. The
company's strategy of lifting profit margins via productivity
and cost improvements on the plant floor is paying off, he said.
The strength in North America as emerging markets sag is
actually a positive trend for Caterpillar, Morningstar analyst
Adam Fleck said. Chinese customers tend to buy a larger
percentage of smaller, less-expensive machinery while buyers in
established markets more often opt for bigger goods.
Caterpillar reported net earnings of $1.6 billion, or $2.37
per share, compared with $1.2 billion, or $1.84 per share, a
year earlier.
Caterpillar's sales rose 23 percent to $16 billion during
the first quarter, the company said.
Analysts on average had projected a profit of $2.13 a share,
according to Thomson Reuters I/B/E/S. Revenue, however, fell
short of the $16.2 billion that Wall Street had expected.
The company increased its profit outlook for the year to
$9.50 per share from $9.25 previously. The outlook for revenue,
however, remained in the range of $68 billion to $70 billion.
Caterpillar's resources segment, which includes mining,
delivered a 73 percent increase in revenue and a 46 percent jump
in earnings. Construction products reported a 13 percent jump in
both sales and profit.