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Investment Overview for Caterpillar (NYSE:CAT)
Caterpillar, also known as CAT, is a leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. Its engines and turbines are primarily focused on power generation, oil drilling and other 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. CAT sells is products through a worldwide network of dealers.
Below are key drivers of Caterpillar's value that present opportunities for upside or downside to the current Trefis price estimate for Caterpillar:
- Construction Industries Market Size: The global construction equipment market declined by nearly 14% and stood at approximately $129 billion in 2016 due to weak global demand and slowdown in China, economic concerns in Europe following Brexit vote and low government spending on infrastructure projects in the United States. We expect it to decline further, and subsequently revive to 2014 levels by the end of our forecast period. However, in case the market grows at a faster rate and reaches $200 billion instead, there could be 10% upside to Caterpillar's current price estimate.
- Resource Industries Market Share: Caterpillar's resource industry market share was 8.2% in 2016. We currently anticipate the the figure to decline and then revive to nearly 12% driven by long-term fundamentals of increasing population, urbanization and energy consumption. If however, the company's market share decreases to around 6% as a result slowing global economy, low mining activity and stiff competition there could be a potential downside of around 10% to the price estimate.
Resource Energy & Transportation division
Caterpillar’s Energy & Transportation division accounts for nearly 52% of the company's value. This division includes the design, manufacture, marketing and sales of engines, turbines and related parts. Although Caterpillar's market share is relatively modest, the overall market size for these products is huge and stood at around $397 billion in 2016. This division accounted for more than 25% of CAT's revenue and EBITDA in 2016 despite significant losses due to the downturn in the oil industry.
Increasing presence in emerging economies
Caterpillar continues to increase its presence in the emerging markets of China, India and Brazil. With the current slowing of China and Brazil economies, the company has witnessed a setback to its top line growth. It has been expanding into these markets to expand product sales and set up manufacturing facilities. Future economic recovery in these markets presents the company a potential opportunity to drive high top line growth for its shareholders.
Rising population and prosperity driving demand for energy, resources and infrastructure
The rising population and prosperity in developing nations are driving demand for energy. This is likely to 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 urban populations. The increased infrastructure spending may drive growth in construction equipment sales.
People migration from rural to urban areas increasing
Several countries, particularly the developing ones, are witnessing large scale migration of people from rural to urban areas, leading to increased infrastructure spending on roads, bridges and buildings. This is likely to drive growth in demand for engines used in industrial applications.
OPEC Deal likely to result in improved crude oil prices
The Organization of the Petroleum Exporting Countries known as OPEC countries decided to cap their crude oil production later in 2016. This resulted in about 15% increase in crude oil prices within a month and we expect this to increase further in 2017 leading to revival of oil and energy industry in the later half of the year. This is likely to boost Caterpillar's sales from its industrial segments which saw huge declines starting from 2015.
Improving macro economic environment
The European Union is currently passing through a phase of relatively muted growth but we believe that its growth prospects could take a positive turn because of quantitative easing policies pursued by the European Central Bank. 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 outside of China and Brazil large potential markets
Emerging economies 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 may 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. The Fed raised interest rate last year, which might lead to a reduced spending on housing because the rate hike gets included in the mortgage interest rates. The same rate hike might cause a deterioration in overall economic activity too. 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.
Also, there has been a sudden dip in global commodity prices as a result of Chinese slowdown which in turn has severely impacted commodity dependent nations such as Brazil. We expect the same to impact Caterpillar negatively because a large chunk of its revenues come from emerging countries such as Brazil and China.
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.
See more on: DCF Methodology
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