Caterpillar Updates: Shifting Bucyrus Distribution to Dealer Network

Caterpillar (NYSE:CAT) has started aligning Bucyrus’ distribution with its own by roping in existing Caterpillar dealers to sell and support former Bucyrus mining products. One of the first efforts towards this goal occurred this week when Caterpillar decided to spin-off a portion of the former Bucyrus distribution business to the Industrial Division of Malaysia-based Sime Darby Berhad (MK:SIME) for around $360 million. ^[1] While this transaction covers dealerships operated by Hastings Deering in Queensland and the Northern Territory of Australia, Papua New Guinea and New Caledonia, Caterpillar is expected to ink several similar deals around the world in an effort to transfer the entire product distribution and support for former Bucyrus machinery to Caterpillar dealers that support mining customers globally.

We believe that these initiatives will provide further upside to Caterpillar stock through better cost controls. Caterpillar mainly competes with Deere and Co. (NYSE:DE), Komatsu (TYO:6301), Terex (NYSE:TEX) and Cummins (NYSE:CMI).

Our price estimate of $100 for Caterpillar’s stock is around 10% above the current market price.

See our complete analysis for Caterpillar stock here

Will help raise cash, control costs and better service customers

This year, Caterpillar hopes to earn around $2 billion from Bucyrus sales, but the negative impact from the acquisition of Bucyrus is expected to reduce profit per share by $0.50. Transferring Bucyrus’ product distribution and support to existing Caterpillar dealers will help Caterpillar rationalize costs and support margins at Bucyrus. Moreover it will help support increased Bucyrus sales as Caterpillar will be able to leverage its existing customer relationships and expand its range of products and services. Also it will streamline operations and reduce the point of contacts for mining customers, thus improving its customer service levels.

Also spinning off of Bucyrus distribution will help Caterpillar raise cash, which will be increasingly important for operational stability in an increasingly uncertain global economic environment. Caterpillar will also be able to use this cash as it aims to expand aggressively through acquisitions.

You can drag the trend lines in the modifiable charts above to see the impact of these trends on Caterpillar’s stock value.

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1. Caterpillar Inc. To Sell Part Of Bucyrus Distribution Business [↩]