Caterpillar Prettier Long-Term

Caterpillar Inc. (NYSE:CAT) reported second quarter EPS of $1.74, above our expectations of $1.52, due to a lower share count, increased price realization and higher international sales volume. The company remains committed to capacity expansion in growth markets outside the U.S., which positions CAT to increase share in mining and energy-related equipment.

Our FY08 EPS estimate of $6.41 — which is above the management guidance — assumes 30% revenue growth in the Middle East, Asia Pacific and Latin America, no growth in North America, and a share count of 608 million. Our target price is $75.50.

A recovery is expected in FY08 in U.S. coal market due to the recent rebound in coal prices and increasing coal exports. Outside North America, metal mine production increased in most regions led by higher prices. Thus, with prices of most commodities higher globally, demand for CAT equipment remains extremely strong.

In June, CAT announced plans to build a manufacturing facility for hydraulic excavators in China. In addition, the company announced plans to invest $200 million over four years to increase manufacturing capacity in India. Recently, CAT announced its plans to add to its China-based research and development (R&D) operations to increase the technical support for products serving markets in China and the rest of the Asia-Pacific Region. CAT also announced a multi-year $1 billion plan to expand capacity at five of its plants in Illinois.

As CAT noted, to drive future investment in the machines and engines CAT sells to assist in the production of energy, crude oil prices need only trade consistently above $40/barrel. With crude oil well above that price selling at over $100/barrel we believe the intermediate-term demand for energy equipment remains well positioned for double-digit growth.

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