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Investment Overview for Caterpillar (NYSE:CAT)
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Caterpillar, also known as "CAT", designs, manufactures and sells machinery focused on mining, quarry and construction applications. It also manufactures engines and turbines focused on power generation, oil drilling and several industrial applications.
The company also sells financial products in the form of financing options of leases and loans and insurance, primarily to drive sales growth of its products.
The company has been operating for more than 85 years and generated sales and revenues of $63 billion in 2012.
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Below are key drivers of Caterpillar's value that present opportunities for upside or downside to the current Trefis price estimate for Caterpillar:
- Resource Industries Market Share: Caterpillar's market share has increased significantly in recent years to 33.5% in 2012 driven primarily by benefits from the Bucyrus acquistion. We currently anticipate the company's market share to decline in the near-term due to suppressed purchase activity from Caterpillar dealers in an attempt to reduce their inventory levels. Thereafter, we anticipate the company's market share to increase slightly over the Trefis forecast period to 31.5% by its end.
If however, the company's market share does not decline much in 2013 and reaches 33.5% by the end of Trefis forecast period then there will be a potential upside of nearly 5% to the ${trefisprice}.
- Construction Industries Market Size: The global construction equipment market size, which currently stands at approximately $135 billion, is expected to grow substantially over the Trefis forecast period to nearly $154 billion by its end. However, in case it is unable to achieve the estimated growth rate in the wake of the European debt crises and the slowing Chinese economy and reaches only $140 billion by the end of the Trefis forecast period, then there is a potential downside of 3% to the ${trefisprice}.
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Resource Industries division
Caterpillar’s Resources Industries division has become the most valuable business for the company, post the Bucyrus acquisition in July 2011. This division includes the design, manufacture, marketing and sales of machinery focused at mining, quarry and forestry related applications.
The high market share that the company now possesses in the global mining equipment market is a potential opportunity to drive margins higher and establish itself as the largest player in the market for several years to come.
Increasing presence in emerging economies
Caterpillar is continuing to increase its presence in the emerging markets of China, India and Brazil. It not only wants to expand into these markets to expand product sales but also as a manufacturing destination. The high growth markets of these economies present the company a potential opportunity to drive high top line growth for its shareholders.
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Rising world population and prosperity driving demand for energy, resources and infrastructure
- The rising world population and prosperity particularly of developing nations such as China and India, are driving demand for energy. This increased demand for energy shall drive growth in demand for engines and turbines used in electric power generation units.
- Several developing nations, such as India are increasing their spending on infrastructure and housing to support their rising populations. The increased infrastructure spending shall drive growth in construction equipment sales.
People migration from rural to urban areas increasing
- Several countries particularly, developing ones are witnessing large scale migration of people from rural to urban ares, leading to increased infrastructure spending on roads, bridges, buildings etc.
- The increase in infrastructure spending shall drive growth in demand for engines used in industrial applications.
Rising demand for iron ore and copper leading to mining industry recovery
- A recovery is expected in the mining industry due to rising demand for commodities such as iron ore and copper. This will cause the global demand for mining equipment to increase.
Improving macro economic environment
- Real estate and housing prices are rising again as the economy is recovering from the financial crises of 2009. This shall lead to increased housing related construction activity which is driving growth in demand for construction equipment.
- Growth in world trade post the financial crises shall lead to growth in demand for cargo vessels and other commercial ocean vessels. This will drive the growth in demand for engines used in marine applications.
Emerging economies of China and India large potential markets
- China and India will be leading sources of mining, construction and power related equipment demand. This presents opportunities for several manufacturers including, Caterpillar.
Other developing areas to exhibit above-average growth
- Eastern Europe, with extensive mineable resources, is projected to exhibit an above average growth in mining equipment demand along with the developing areas of Asia, the Africa/Mideast region and Latin America, with the mature markets of Western Europe and North America trailing.
Rise in interest rates shall moderate growth of market size
- Several developing countries are facing high inflation along side growth. Central banks often resort to raising interest rates to control inflation.
- Higher interest rates in turn increase borrowing costs for companies leading to an increase in price of their products. This, dampens demand moderating the growth in market size.
European debt crises
- European austerity measures can moderate the increase in demand for machines in the short term.
- The European sovereign debt crisis has forced several European nations to adopt severe austerity measures in order to control their debt levels.
- The austerity measures shall control spending across sectors such as, infrastructure projects, thus dampening growth in demand for various market sizes.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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