How Does Global Growth Drive Caterpillar’s Stock?

by Trefis Team
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Caterpillar (NYSE:CAT) is one of the largest manufacturer of mining and construction equipment, diesel and natural gas engines, power generation and industrial turbines and diesel-electric locomotives. The company on account of its superior product portfolio and extensive distribution network, which serves 184 countries, is a leading player in several markets.

Over the past two decades, it has increased focus on developing economies as demand for mining, construction and power industries related products has shifted from developed to developing economies. As a result, in 2011, sales from outside the U.S. constituted 70% of the total sales of the company, up from 50% in 2001.

The mining industry related products at 39%, constitute the largest portion of Caterpillar’s (CAT) value, followed by power industry related products at 31% and construction industry related products at 21%, according to our analyses. The remaining portion of CAT’s value comes from loans and other financial services, offered by the company to promote sales of its industrial products.

We currently have a stock price estimate of $90 for the company, marginally above its current market price.

See our complete analysis of Caterpillar here

1) Mining business: CAT designs and manufactures a variety of surface and underground mining equipment and machinery. Post the Bucyrus acquisition in July 2011, CAT possesses the widest portfolio of mining equipment worldwide. However, with economic growth slowing in developing economies, sales growth has been hit in the mining segment of the company. In the third quarter of 2012, sales in the division declined 3% sequentially. [1] [2]

China, which is the world’s largest consumer of both iron ore and coal, has witnessed lower economic growth in 2012 compared to 2011. As a result, the demand for commodities has declined, weighing on their prices. Iron ore declined to a low of $100 per dry metric tonne in September 2012 from $180 a year ago. Though it has recovered to $120 per dry metric tonne since. [3] Lower prices have pressured margins of mining companies, which in turn have lowered their investments. As a result, demand for mining machinery and equipment manufactured by CAT has suffered a negative impact.

We anticipate this softness in the global mining industry to remain in the near term.

However, CAT should continue to gain market share by leveraging its upgraded product portfolio from Bucyrus acquisition and its global dealer network.

2) Power business: CAT manufactures engines and turbines used in power generation, marine and petroleum industries and diesel-electric locomotives. This division’s product portfolio was enhanced significantly by acquisitions of Electro-Motive Diesel Inc. (EMD) in 2010 and MWM Holding in 2011. The latter is a supplier of natural gas and alternative-fuel engines, which is helping CAT capture the growing demand for natural gas powered engines.

3) Construction business: CAT manufactures loaders, tractors, excavators and other machinery used in infrastructure and building construction.

Over the past few months sales in construction as well as power business of CAT have declined due to weakness in global economy that has impacted investments in power generation and construction industries worldwide. Sales in construction and power business of CAT declined 8% and 4% respectively in the third quarter of 2012, on a sequential basis. [1] [2]

Factors That Support Caterpillar’s Current Valuation

However, over the long term sales and earnings of the company are poised for growth as increasing global population and urbanization and growing demand for energy will raise demand for products manufactured by CAT.

The rising world population and urbanization particularly in developing nations like China and India is raising demand for energy, which in turn is raising demand for engines and turbines used for power generation purposes, and these are manufactured by CAT. Mining equipment sales are also bound to rise as more coal needs will arise to feed power plants. Increasing spending on infrastructure and housing to support growing population will also benefit CAT by raising demand for its construction products.

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

  1. 2012 Q2 10-Q, August 6 2012, [] []
  2. 2012 Q3 10-Q, November 2 2012, [] []
  3. Iron ore monthly price, December 27 2012, []
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