UPDATE 1-Caterpillar gains traction on Merrill Lynch upgrade.

(From CBS Marketwatch (Stories))

Byline: Shannon Mitchell

NEW YORK (CBS.MW) -- Caterpillar is poised to deliver peak earnings in 2007 as demand for heavy construction and mining machinery picks up, and sales from its line of compact machines begin to contribute significantly to revenue, a Merrill Lynch analyst said Monday.

Analyst Andrew Obin lifted his rating on the heavy-equipment maker to "buy" from "neutral" and set a $102 price target. Caterpillar's shares climbed as much as 3.7 percent higher on an intraday basis before paring gains to end up 97 cents, or 1.3 percent at $74.

Obin also raised his 2007 earnings estimate to $8.35 per share, up from a prior estimate of $7.75, on a revised revenue forecast of $31.7 billion vs. $29 billion.

The analyst said an improvement in spending in the non-residential building and non-building segments of the construction sector will drive sales of heavy construction machinery starting in the second half of 2004.

Up to now, growth in construction spending has been led by the residential sector, which is less lucrative for Caterpillar as the building of residential properties generally uses smaller, less expensive and lower-margin equipment, said Obin.