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CAT AT A GLANCE

P/E ► 8.28 AVG EV/EBITDA ► 7.44 AVG ROA ► 6.5% AVG ROE ► 32.7% AVG Debt to Equity ► 9.34 VERY HIGH Current Ratio ► 1.34 AVG Interest Coverage Ratio ► 3.02 AVG

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating Expenses Research & DevelopmentSG&AAmortization & Depreciation

Caterpillar (NYSE: CAT) manufactures heavy-duty vehicles and technologies designed for constructing buildings and mining the earth. Worldwide, Caterpillar is the leading manufacturer, by revenue, of engines and turbines used in machinery, electric generators, highway and non-highway trucks, and seaborne vessels.

During the eight years before 2009, CAT has seen unparalleled growth, largely on the back of a booming U.S. construction market, higher petroleum exploration and production, and growing demand for its equipment overseas. In 2007, the U.S. housing market came to a halt in the wake of the subprime lending crisis, but Caterpillar still managed to post record sales and profits since the collapse, thanks to robust demand for infrastructure in emerging markets. The company produced the highest sales in Caterpillar history last year, growing revenues from $11 billion in 1990 to almost $51.3 billion in 2007.^[1] The company has increased in presence in several key regions such as China, which has seen unprecedented wealth growth and has a huge appetite for energy. Given Caterpillar's core offerings of construction equipment and machinery for mining and energy infrastructure, the company may be poised to take advantage in these regions.

Although the company is somewhat dependent on U.S housing construction, which has been in accelerated decline due to the subprime lending crisis, the importance of the U.S. economy to CAT's business continues to diminish as international sales drive growth. This demand is being driven largely by the global boom in infrastructure development discussed above. The global economic slowdown and commodity price collapse caused demand for mining machinery to dip below 2007 levels during the fourth quarter of 2008.^[1]

[edit] Company Overview

Caterpillar is well-known throughout the world for its iconic large yellow machines.

With nearly 95,000 employees, Caterpillar's global footprint spans six continents and boasts the highest worldwide sales of its competitors. In addition to manufacturing and selling machines and engines, Caterpillar also provides financial products to its customers. Its three main businesses combined to generate $4.9 billion in operating profits on $45 billion revenue in 2007 (equating to 10.9% operating margin).

In 2007, Caterpillar posted record sales and profit. Sales increased 8.3% and profit increased $4 million, to $3.541 billion. This record year took place despite severe recessionary conditions in the U.S. housing market, related to the subprime lending crisis, and in highway truck engine demand, again, related to diminishing housing construction. Excellent growth and investment in the Asia/Pacific region and wise inventory corrections related to the U.S. subprime crisis offset these negatives. North American dealers took machine inventories down $1.1 billion in 2007 and continued reducing inventories through the first half of 2008, yet the company as whole grew for the year. Higher sales volume abroad and pricing, combined with $890 million in currency benefits related to the declining Dollar, stimulated the growth. The insatiable demand for infrastructure in emerging markets has created an impressive backlog for the company heading into 2008, paving the way for a hopeful 2008 in lieu of anemic U.S. economic conditions. In response to this demand, CAT announced in mid-2008 a $1 billion dollar expansion campaign for its 5 major production facilities in Illinois. CAT also has plans for a $200 million expansion of its factories in India and by March 2009 will begin producing hydraulic excavators in Russia.^[2]

• Machinery: This division produces light duty, heavy duty, forestry, off-highway, paving, and mining equipment. It generates the highest revenues for CAT and accounted for 57% of operating profit in 2006 ($3 billion). 2007 sales totaled $28.4 billion, a 9% increase from 2006. Machinery operating profit of $2.758 billion was down $269 million, or 9 percent, from 2006.

• Engines: This segment produces on-highway engines, off-highway engines, generator sets, gas engines, electrical systems (motors), and rental products. Engines accounted for 31% of operating profit in 2006 ($1.6 billion). 2007 sales totaled $13.6 billion, a 6% increase from 2006. Engines operating profit of $1.826 billion was up $196 million, or 12 percent, from 2006. Growth in demand for electric power, petroleum, marine and industrial applications more than offset the profit decline related to the drop in demand for on-highway truck engines as a result of the declining U.S. housing market.

• Services: This business offers primarily financial products such as financing and insurance for customers and dealers of Caterpillar Machinery and Engines. CAT Services generated the smallest operating profit of the three divisions at 12.4% ($670 million). However, financial services allows Caterpillar to generate less cyclical revenue and earnings through its insurance and financing products, most of which involve regular payments from customers. 2007 sales totaled $3 billion, a 13% increase from 2006. Financial Products operating profit of $690 million was up $20 million, or 3 percent, from 2006.

[edit] Acquisitions

The company has only engaged in two major acquisitions greater than $1 billion in value in the past decade, the most recent being the Progress Rail transaction. Caterpillar acquired this company, which supplies aftermarket services to the railroad industry, in order to diversify its customer base. Caterpillar has stated the desire to acquire more companies in order to further diversify its business.

[edit] International Footprint

Caterpillar has aimed to grow its international business, in particular in the burgeoning Chinese market and India.

[edit] Trends/Risks

[edit] Sensitivity to oil prices

The company's Machinery and Engines are most commonly used for oil and energy infrastructure, power generation, mining, heavy construction, and public infrastructure. As a direct result, the company profits from a rise in oil and energy spending and suffers in during declines. Oil prices have risen dramatically over the past several years, suggesting that oil companies will continue to require Caterpillar's drilling, mining, and other machinery used in oil exploration and production. A similar strong increase in demand for machinery used in coal mining and exploration has accompanied the prolonged increase in coal prices. Demand from these two sectors has allowed CAT to continue increasing sales in North America, despite the economic downturn and troubles in the housing market.^[3] On the other hand, rising petroleum and gas prices make renewable energy technologies such as more financially feasible. A rise in ethanol or solar power, for instance, would be damaging to Caterpillar's core energy business.

[edit] Increasing demand in the Third World

Caterpillar stands to profit from growing global economies, especially China and India, where an increase in overall prosperity in these massive populations will drive higher demand for public infrastructure. Caterpillar produces key machinery used in such large scale projects such as the construction of power plants and mining. Currently non-U.S. sales represent more than half of CAT's revenues and are expected to continue increasing.

"Developing countries maintained expansive economic policies, which allowed good economic growth to continue," the company said in a statement. "As a result, construction increased significantly in many countries." Caterpillar will look to build on those markets by building three new factories in China for engines, wheel loaders and parts. It has also purchased the remaining 60% stake in Shandong SEM Machinery Co., one of Caterpillar’s 16 Chinese ventures.

To give a perspective for the magnitude of this trend, for the second quarter of 2008, sales increased 52% for Asia/Pacific, 27% for Latin America, and 22% for Europe/Middle East/Africa. It should be remembered that the weaker dollar contributed $384 million to CAT's overall $2.268 billion increase in sales for Q2 2008, despite this the underlying real growth in sales remains obvious.^[4]

[edit] Exposure to commodities prices

The company's products are used across various commodity industries, including lumber, oil, coal, and elements which require excavation such as precious metals, stone, and minerals. Higher prices of any such commodities typically correlate with greater supply, thus meaning an uptick in the equipment required to produce them.

At the same time, rising commodity prices effect the company's bottom line by increasing transportation and raw material costs. CAT predicts that its material costs in 2008 will be 2.5% to 3% higher than 2007. Although CAT has announced price increases of 5-7% for all its products, to become effective on January 1, 2009, management expects that material costs will increase more than prices for 2008.^[5]

[edit] Natural disasters risk

Devastation from natural disasters such as hurricanes, tornados, floods, fires, and earthquakes often dictate a need for large scale rebuilding, a task for which Caterpillar machinery is well-suited. For example, Hurricane Katrina created a high demand for rebuilding equipment such as bulldozers, a core Caterpillar offering. Predicting most natural disasters is very difficult, some would say impossible. However, in increase in global warming may portend an increase in the frequency and severity of hurricanes.

[edit] Competition

Caterpillar competes primarily with Komatsu, Deere & Company (DE), AB Volvo (VOLV), Terex (TEX), and CNH Global N.V. (CNH). Worldwide, Caterpillar is the largest, most diversified competitor, outpacing its nearest competitor, Deere & Company (DE), nearly two to one in sales.

[edit] References

1. ↑ ^{1.0 1.1} CAT 2008 10K  
2. ↑ http://community.investopedia.com/news/IA/2008/Caterpillar_Digs_Emerging_Markets_CAT.aspx
3. ↑ 2008 Q2 Earnings Call
4. ↑ http://seekingalpha.com/article/86304-caterpillar-inc-q2-2008-earnings-call-transcript?source=feed
5. ↑ http://seekingalpha.com/article/86304-caterpillar-inc-q2-2008-earnings-call-transcript?source=feed