China Helps Make Caterpillar Great Again as Outlook Improves

Daniel Acker/Bloomberg News

Caterpillar Inc., the iconic American machinery maker, is finally emerging from a four-year slump, thanks in part to China.

The company said it’s raising expectations for 2017 sales, based on an improving outlook in China and mending demand in energy and transportation. On April 25, Caterpillar increased revenue forecasts to a range of $38 billion to $41 billion. First-quarter earnings and sales also topped expectations.

An improving outlook adds to signs that Caterpillar’s long-awaited turnaround may be at hand after it cut costs to ride out a slump in demand from miners and energy explorers. China’s economy has accelerated for two straight quarters, brightening sales prospects for the company’s signature yellow machines. The outlook offers investors good news at a time when a U.S. inquiry into taxes weighs on shares.

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“Most people have seen enough evidence that the environment is turning from brutal to positive again,” Matt Arnold, an analyst at Edward Jones & Co., said in a telephone interview. “Between Caterpillar’s machinery numbers and other indicators and metrics, the industrial economy globally looks like it’s getting better, and Cat is going to harness that.”

The results come days after Nucor Corp., the biggest steelmaker in the United States, said that it is seeing renewed demand growth in China.

“Sales in Asia/Pacific were higher as a result of an increase in end-user demand, primarily in China, stemming from increased government support for infrastructure and strong residential investment,” Caterpillar said in a statement.

This increase was partially offset by an unfavorable impact from changes in dealer inventories, primarily in China, which were about flat in the first quarter of 2016 and decreased in the first quarter of 2017.

Earlier in April, Goldman Sachs Group Inc. added Caterpillar to its “conviction” list of highly recommended stocks. The bank cited machinery markets in the early stages of recovery and a change in the company’s strategy toward improving returns on capital rather than boosting market share.

Gross domestic product in China increased 6.9% in the first quarter from a year earlier, compared with a 6.8% median estimate in a Bloomberg News survey. It was the first back-to-back acceleration in seven years.

"There are encouraging signs, with promising quoting activity in many of the markets we serve and retail sales to users turning positive for both machines and energy [and] transportation for the first time in several years," CEO Jim Umpleby said in the statement.