Caterpillar Inc. (CAT) reported encouraging results for the first quarter of fiscal 2010 with EPS of 50 cents from 39 cents in the year-ago quarter. Net earnings were $233 million, up from $230 million in the first quarter of fiscal 2009.

The increase was driven by a decline in operating costs. Reported EPS surpassed the Zacks Consensus Estimate of 39 cents.

In response to the challenging global business environment, Caterpillar has been implementing aggressive cost-cutting initiatives since 2009. The company has reduced its workforce significantly. Also, the company has implemented full or partial shutdowns at some of its plants, delayed its R&D programs and reduced its capital expenditure substantially. These actions helped the company reduce its manufacturing costs by $566 million in the first quarter.

Revenue in the quarter dropped 11.0% to $8.2 billion from $9.2 billion posted last year. The revenue decline in the quarter constituted lower Machinery sales volume (-$295 million), and lower Engines sales volume (-$978 million).

The company witnessed revenue weakness across its end markets. Together, the Machinery Group and the Engines segment reported revenue decline of 11%, while the Financial Products segment revenue was down 4%. This was due to a combination of slow residential and commercial construction activity, a reduction in dealer orders and tight lending conditions.

Regionally, revenue in North America was down 18% year over year, while in Latin America it was flat. We expect an improvement in the economic conditions by the end of 2010 and particularly in Latin America.

Economic growth in emerging markets will be more significant than in developed markets. Thus, management raised its sales guidance from the range of $35.6 -$40.5 billion to $38-$42 billion. EPS is also expected to range between $2.50 and $3.25 from the previously provided guidance of $2.50 per share.

Caterpillar is well positioned to take advantage of the growing need for global infrastructural development. However, unfavorable product mix and higher pension expenses on the company’s 2010 earnings may pull it back. Thus, we reiterate our Neutral recommendation.
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