Caterpillar (CAT), the world's largest supplier of heavy machinery, is facing headwinds due to declining mining activity across the world. Although, Caterpillar is in worse condition but it doesn't mean that this mega giant will not recover in the future. The sun hasn't set for the company and still it has potential for a nice comeback.
Despite poor financial results in the recent few quarters, Bill Gates is still investing in Caterpillar. Bill Gates owns 10.76 million shares in the company and he's buying more. Many analysts have predicted that the company's profit will decrease this year and assigned a hold rating for the company. Now the question is why Gates is still bullish on Caterpillar? The answer is simple. He is a passive long-term investor, and sees better days for the company ahead.
Yes, Bill Gates is correct the long term outlook of Caterpillar is bright. Caterpillar is heavily dependent on a healthy demand from China. If China's economy improves, the share price of the company will rise. Due to weak mining activity in China, the company reported a 43 % decline in its second quarter earnings. Revenue saw a depreciation of $2.753 billion to $14.621 in the second quarter of 2013.
Caterpillar is facing headwinds from the commercial sector, but recovery in residential construction will provides significant revenue. The Chinese economy is now showing signs of rebound. According to the IMF, the Chinese economy is projected to grow 7.8% in 2013 and 7.7% in 2014. China, the world's largest market for Caterpillar's products and services, plans to move millions of rural residents into cities that is positive news for machine manufacturers, like Caterpillar.
More than 50% of China's population lives in rural areas. China intends to move 250 million rural residents into cities over the next dozen years. China's urbanization plan predicts that Chinese growth rates have already bottomed out and will soon begin to surge again. The World Bank estimated that China's urbanization rate will increase to nearly two-thirds by 2030, meaning about 13 million more people will move to cities every year.
To accommodate millions of people into cities, China will build more houses that in turn will increase the demand for Caterpillar's construction equipments. China's spending on construction is expected to increase around 8.5% per year until 2017. Besides houses, the urbanization will also increase the demand for roads, hospitals, schools and subway systems, pointing to tremendous opportunities for Caterpillar. In 2012, Caterpillar posted an earnings per share of $8.90 and is estimated to post an EPS of $6.30 in 2013. Analysts are expecting revenue and earnings growth in 2014.
The Chinese government is paying more attention towards mechanized agriculture. The urbanization will free up more land for agricultural and commercial development because rural residents will be moved from single-story homes in villages to multiple story buildings in cities. The more land for agricultural will increase the demand of agricultural machinery. In China, agricultural machinery and industrial robotics are the fastest growing business. According to estimates, agricultural mechanization will increase from 52% in 2012 to 60% in 2015, 70% in 2020, and up to 82% in 2030. As Caterpillar is a famous manufacturer of agricultural machinery, the increased mechanized agriculture will surely boost up the company's sales.
Besides China, Caterpillar has growth opportunities in India. The company is investing in India to achieve long-term market leadership. India is one of the top five growing economies in the world, and is focussing on infrastructure development along with sustainable inclusive growth. The Indian construction sector is expected to grow 7.6% in FY2013-14. Due to increased infrastructure development, the market in India offers a significant opportunity for growth to Caterpillar.
Caterpillar's short-term performance may be bumpy, but it will benefit from long-term growth in regions such as China and India. Despite recent and near term construction activity concerns, China will be a key growth market for Caterpillar over the long term. The demand for Caterpillar's products will improve in 2014 with the recovery in global construction markets. In my opinion, CAT is still a fantastic opportunity for investors.