Caterpillar’s $86 Fair Value: EM Demand Will Lift Machinery Market Share

After hitting record high sales in Q3 2011 with revenues reaching $15.7 billion, up 41% y-o-y, and soaring profits of $1.41 billion, up 44% y-o-y,  Caterpillar (NYSE:CAT) hopes to continue this trend going ahead into 2012 supported by strong demand for mining and machinery equipment from emerging markets such as India and China with expanding urbanization. Management says it expects sales and revenue growing by 20% in 2012 and will continue to expand production levels for next year. ^[1] Caterpillar in particular is very bullish about the growth prospects in China where it’s expanding its production capacity. It mainly competes with Deere and Co. (NYSE:DE), Komatsu (TYO:6301), Terex (NYSE:TEX) and Cummins (NYSE:CMI).

Our complete analysis for Caterpillar’s stock is here.

CAT Expects Better Growth in 2012

Caterpillar’s order backlog at the end of Q3 was at an all-time high of $17.4 billion with strong growth prospects from emerging countries. It expects growth in developing countries in 2012 will be similar to 2011. ^[2] After a stunning Q3 performance, the company expects to end 2011 with sales of $58 billion versus $42 billion in 2010. And for 2012, Caterpillar hopes to expand mining and investment production as commodity prices are receding from their highs and expects revenues to grow by 20%. However, growth is expected to be slow in the developed markets due to overall economic slowdown and the impending debt crisis in Europe.

China Investments Continue to Expand

Caterpillar will be expanding production capacity in half of its factories in China as demand for infrastructure and housing will lead to more demand for heavy construction equipment. Caterpillar currently has 16 factories in China. However, it continues to face competition from small players such as Japan’s Komatsu and China’s Sany Heavy, Zoomlion and Xugon.

While we estimate Caterpillar’s share of global machinery market will increase from ~32% in 2012 to ~34% by the end of our forecast period, Trefis members project an increase from 36.5% to 41% during the same period. The member estimates imply an upside of 12% to the Trefis price estimate for Caterpillar’s stock.

We currently have a Trefis price estimate of $86 for Caterpillar’s stock, about 9% below the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Caterpillar confident emerging markets will provide growth, Xinhuanet, Nov 2, 2011 [↩]
2. CORRECTED-BRIEF-Caterpillar Q3 results, Reuters, Oct 24, 2011 [↩]