Despite Macro Concerns, Caterpillar’s Machinery Business Outlook is Solid

Caterpillar’s (NYSE:CAT) construction and machinery revenues saw an uptick in 2010 led by improved macro-economic conditions boosted by demand from emerging markets and the company’s acquisitions of EMD and Bucyrus International. But the hovering concerns around European debt crisis and sluggish U.S. growth can push down Caterpillar’s machinery revenues in the second half of 2011, while also impacting competitors like Deere and Co. (NYSE:DE), Komatsu (TYO:6301), Terex (NYSE:TEX), Hitachi Construction Machinery (TYO:6305), Cummins (NYSE:CMI), and GE Energy (NYSE:GE). We however believe that Caterpillar’s long-terms prospects are strong as it’s in a position to satisfy the growing demand from emerging economies by leveraging its acquisitions.

While we estimate Caterpillar’s share of global machinery market will increase from 31% in 2011 to around 38% by the end of our forecast period, Trefis members expect an increase from around 34% to 42% during the same period. The member estimates imply an upside of near 10% to the Trefis price estimate for Caterpillar’s stock.

We currently have a Trefis price estimate of $116 for Caterpillar’s stock, about 60% above the current market price.

Slowdown in Global Growth

The European debt crisis seems to be worsening with the risk of spreading to other economies in Euro zone like Spain and Italy. Meanwhile, the U.S. also isn’t doing enough to stimulate its economy that is beleaguered with high unemployment. This has caused an overall dip in global sales growth and the International Monetary Fund (IMF) is forecasting the developed countries will grow at an anemic 1.6% in 2011, while global growth will reduce from 5% in 2010 to 4% in 2011 and 2012. ^[1]

Since construction and farm machinery sales are closely correlated to the health of economy, slower global growth will have a direct impact on Caterpillar’s earnings. According to the company’s dealer statistics, Caterpillar’s growth in global retail deliveries of machinery is decelerating and stood around 34% yoy growth in the three-month rolling period ended August 2011. (Read Macro Risks Threaten to Derail Caterpillar’s Impressive Growth This Year)

Caterpillar Consolidating its Position in Mining, Rail Machinery

Caterpillar acquired Bucyrus last year and through this union it can offer the widest range of mining equipment and compete more effectively with other large competitors such as Joy Global and Komatsu in mining machinery market. We expect that Caterpillar will be able to exploit the synergies and will be able to sell Bucyrus products through its extensive global dealer network. This will in effect make Caterpillar a ‘one-stop shop’ for major mining companies such as Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP).

The recent acquisitions of EMD and FCM Rail will help Caterpillar to exploit opportunities in the rail industry which will further boost its market share.

Our complete analysis for Caterpillar’s stock is here.

1. IMF World Economic Outlook: Weak and Bumpy Global Recovery Ahead, Sept 20, 2011 [↩]