Caterpillar Inc. (CAT) said Friday its net quarterly profit rose 4.3 percent, helped by increased sales of engines and other machinery, and it stuck by its full year forecast, sending its shares higher.

Although the company has been pressured by higher operating costs and weak demand from U.S. builders -- pressures that are expected to continue in 2007, the market was relieved the company didn't trim its 2007 outlook.

"People were cautious going into this and really expecting the worst," said John Kearney, an analyst at Morningstar.

The Peoria, Illinois-based maker of heavy construction and mining equipment said its fourth-quarter profit rose to $882 million, or $1.32 a share, from $846 million, $1.20 a share, last year.

Sales rose 14 percent to $11 billion, lifted by a 13 percent jump in machinery sales and a 17 percent rise in engines sales.

Profit fell two pennies short of the Wall Street estimate of $1.34, as compiled by Reuters Estimates, but sales topped the consensus estimate of $10.26 billion.

NO HAIRCUT

Looking forward, Caterpillar expects to report full-year earnings in the range of $5.20 to $5.70 on sales that are flat to up 5 percent as "continued strength in industries like mining and oil and gas ... offset sharp declines in sales of on-highway truck engines and sales to U.S. builders."

Eli Lustgarten, an analyst at Longbow Research, said that essentially represented a reiteration of Caterpillar's earlier forecast for this year, something the market was relieved to hear. "Most people felt they were going to haircut the outlook," he said.

In a note to investors, Andrew Obin, an analyst at Merrill Lynch agreed: "The fear was that CAT was going to miss significantly and cut its outlook."

In mid-morning trading on the New York Stock Exchange, Caterpillar shares were up about 2.4 percent at $61.02 after closing at $59.63 on Thursday.

Caterpillar's margins have slid as demand slows for its earth-moving equipment due to the anemic U.S. homebuilding market and raw material prices rise.

The slowdown in U.S. residential building, coupled with a temporary but dramatic drop in demand for diesel engines as a result of new U.S. clean-air rules, is expected to continue in 2007 but will be offset by strength elsewhere around the globe.

"The sense I get is the U.S. is going to be pretty tough sledding in 2007 but the rest of the regions look pretty good," said Kearney at Morningstar.

BIG PICTURE

The company expects the U.S. economy as measured by gross domestic product will grow 2.5 percent in 2007, with stronger growth in the first half than the second.

It predicted the U.S. Federal Reserve will cut interest rates by 50 percentage points in 2007, beginning sometime this summer, and that there will be 1.7 million U.S. housing starts in 2007.

And it expects North American truck production to fall 48 percent in 2007, up from a previous forecast of a 37 percent decline, as a result of tough new emission rules.

In the run-up to the new rules, which took effect January 1, truckers rushed to buy vehicles because they were worried about the reliability and costs of the powerplants designed to comply with the new standard.

While those accelerated purchases -- known within the industry as the "prebuy" -- bolstered truck and engine-makers' bottom lines in 2006, they are widely expected to result in a sharp drop-off in sales in 2007.

Through Thursday, Caterpillar shares had fallen about 4 percent over the last 12 months, underperforming the company's 47 peers on the S&P Machinery subindex, which have risen, on average, about 11 percent over the past year.

The stock closed Thursday at $59.63, well off the 52-week high of $82 it hit last May.

It trades at about 10.6 times expected 2007 earnings, a discount to its peers, which trade, on average, at about 15 times 2007 expected earnings.