Caterpillar CEO is confident on recovery

The tide of opinion may be turning increasingly towards the idea that the US economy is heading for a double-dip but Doug Oberhelman is unconvinced.

If anything, the chief executive of Caterpillar, the maker of construction and mining equipment viewed widely as an industrial bellwether, says he is more upbeat now than he was at the start of the year.

“There won’t be a double-dip,” he tells...

the FT in an interview at the company’s headquarters in Peoria, Illinois. “I don’t see a return to high growth, but I think we’re going to bump along.”

Caterpillar’s relative bullishness – it is forecasting that the US economy will grow by 2.5 per cent this year – is important, not only because of the size of the company but also because it has a good record of economic forecasting.

The manufacturer was one of the first big US companies to warn in 2007 that the US was entering a serious economic downturn.

Mr Oberhelman’s view comes primarily from conversations with the companies that buy Caterpillar equipment.

“I’ve been meeting a customer a day for months,” he says. “I haven’t found one this year that hasn’t said business is getting better, even if it’s a long way from what it was.”

In addition, he says many of the problems that faced the US at the start of the recession no longer look as threatening.

“The US economy is performing at such a low rate and so many of the excesses have wrung out,” he says.

“The banks have mostly been recapitalised. Housing is close to, if not at, the bottom. It’s hard for me to see how we could go over a cliff like in 2007-08 when this was all beginning.”

Caterpillar has backed up its optimistic outlook with a range of capacity expansions.

It closed last month on its $7.6bn acquisition of Bucyrus International, the maker of mining machinery, which transformed the company into by far the world’s biggest supplier of large mining equipment.

It plans to spend a total of $3bn this year in capital expenditure.

In recent months, the manufacturer has announced plans for new factories in Singapore, Thailand, China and Brazil.

In the US, it is building a new distribution centre in Washington state while expanding its factories in North Dakota and Kansas.

Caterpillar has hired about 29,000 people worldwide in the past 20 months, some 13,000 of them in the US, with most of the rest in China, Brazil, Mexico and the UK.

The manufacturer’s revenues hit a record $14.2bn in the second quarter, adding to the picture of a company accelerating at full throttle.

Investors are not so convinced – Caterpillar’s shares have underperformed the wider market this year.

In part this is because, in spite of strong sales, the company’s second-quarter profit fell short of analysts’ estimates as it felt the effect of the Japanese earthquake, weaker Chinese demand and took on $4.5bn in new debt to finance the Bucyrus acquisition.

Mr Oberhelman says the company may have also suffered from its bellwether status, which makes it something of a proxy for investor bearishness on the industrial economy.

“Traditionally, we’ve been perceived as an indicator of the global economy,” he says. “Investors are just nervous about the uncertainty of global economic growth.”

He thinks that nervousness is largely unfounded. The danger, he says, is that the jitters themselves hamper the recovery.

“We could all pull in our collective dollars because we’re all afraid of not what’s happening but what might be happening down the road,” he says. “It could be a self-fulfilling prophecy.”

Two-thirds of Caterpillar’s revenues come from outside the US with China its most important market. There, Mr Oberhelman thinks concerns about slowing growth are overblown.

“There has been a slowdown in China, which is healthy,” he says. “Thank God it happened, because we were all rushing in there, committing resources, growing at rates that couldn’t be sustained over time. So now we’ll see a lower growth rate but one that’s still pretty high by world standards.”

“We’ll see China reflate in the next few months, going into the Chinese New Year [in January],” he says. “That will remove a very large question mark in the world economy about what China’s going to do, which has been a big damper on sentiment.”

Elsewhere, he again sees little evidence of another downturn.

“Brazil is red-hot. We’ve not seen any breather down there,” he says. “The Middle East is still doing well, the mining business is still strong. So far, it’s hard to paint a picture of a massive slowdown again. But we’re watching.”

Source: Hal Weitzman, Financial Times