Caterpillar: Engines, Energy & Emerging Markets Lift Outlook

Caterpillar’s (NYSE:CAT) stock has been under pressure since the beginning of last week despite encouraging news of new facilities, orders and completed acquisitions from the company, largely due to choppy global economic environment. The stock declined sharply on Tuesday last week along with the broader equity market weakness and has been range bound since then. Caterpillar’s machinery and engines business competes globally with Deere and Co. (NYSE:DE), Komatsu (TYO:6301) amongst others.

Our $86 price estimate for Caterpillar stock is about 10% below market price.

See our complete analysis for Caterpillar stock here

Caterpillar targets growing markets in developing countries

Last Wednesday, Caterpillar’s Chief Financial Officer Ed Rapp reiterated the company’s growth expectations from emerging markets, which is expected to pick up the slack in demand from developed countries. ^[1] Urbanization in emerging markets means greater demand for infrastructure and housing, which will spur demand for the company’s heavy equipment.  Caterpillar plans to expand production levels in around half of its 16 factories, and the company has been investing in China to tap growth opportunities from the country’s massive infrastructure projects and flourishing mining sector.

Last Thursday, in keeping with its expectations, Caterpillar announced additional investment in Russia to produce off-highway trucks to cater to regional quarry and mining customers. The company expects to start shipping trucks made in this facility to customers by the end of the year. ^[2]

The one mitigating factor to Caterpillar’s penetration in developing markets is rising competition. Caterpillar market share has been slowed by competition from Japan’s Komatsu and China’s Sany Heavy, Zoomlion and Xugong. According to Off-Highway Research, Caterpillar market share in China’s excavator market has fallen from 10 percent fiver years ago to 7 percent now. ^[1]

Recent announcements show growth in Engines unit

Last week, Caterpillar announced completion of its acquisition of MWM Holdings after recently receiving clearance for the transaction from European Commission. ^[3] MWM is a global supplier of sustainable, natural gas and alternative-fuel engines and will become a part of Caterpillar’s Electric Power Division. We believe that this acquisition will help spur the market share growth of Caterpillar’s engine division by providing more customer options for sustainable power generation solutions.

Earlier this week, Caterpillar also announced the execution of a 10-year agreement with Vestas Wind Systems, under which Caterpillar will recondition turbine parts and remanufacture minor components and sub-component repairs to boost Vestas’ servicing capabilities. ^[4] This deal will support revenue growth at the Engine’s division in the long-term.

Caterpillar also purchased 46 acres of land within the Tejon Ranch Commerce Center in California to grow its global service parts distribution network. This new distribution center will Caterpillar’s dealers and customers throughout western U.S. We believe that this new facility will help support Caterpillar’s market share in U.S. through improved customer service after it is operational in late 2012. ^[5]

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

1. Caterpillar confident emerging markets will provide growth [↩] [↩]
2. Caterpillar Expands CIS Manufacturing Footprint with Additional Investment [↩]
3. Caterpillar Completes Acquisition of MWM [↩]
4. Cat Reman and Vestas Wind Systems Reach Agreement on Remanufacturing Wind Turbine Components [↩]
5. Caterpillar Announces New Parts Distribution Center in California [↩]