Is It Time To Buy Caterpillar?

May. 7.14 | About: Caterpillar Inc. (CAT)

Summary

Last year, the Bill and Melinda Gates Foundation Trust purchased 1 million shares of Caterpillar.

China will be a key growth market for Caterpillar over the long term.

The growing construction equipment market will benefit Caterpillar.

Attractive for dividend investors.

The Bill & Melinda Gates Foundation Trust owns several stocks, and one of them is Caterpillar (NYSE:CAT). As of 12/31/2013, the trust owns 18 stocks with a total value of more than $20 billion. The trust now holds 11.26 million shares of Caterpillar, up from 10.76 million in Q2 2013 and 10.26 million in Q4 2012. Caterpillar now constitutes 5.10% of the Gates investment trust. Likewise, I believe Caterpillar is a good long-term investment. Let me explain why.

Caterpillar is a machinery manufacturer, and a very large part of its business depends on the demand for construction and mining equipment. The company is expanding its operations in Asian markets like China and India, where it has great growth opportunities. Its main goal, in terms of growth, is to capture more market share in emerging markets, especially in China and India. Currently, revenue generated from China is only a small portion of its total revenue. However, along with increasing demand of globalization and urbanization, the country becomes the most profitable market in the world for companies like Caterpillar.

Last year, Caterpillar sales in Asia/Pacific declined overall, but sales in China increased as it focuses on increasing field population, improving customer loyalty and providing superior customer support in conjunction with its independent dealers. The company's total sales and revenues in China in 2013 were about $3.5 billion, up more than 20% from 2012. This represented about 6.3% of its total sales and revenues last year.

According to a research report, the global construction equipment market will increase from $143.6 billion in 2012 to $192.3 billion in 2017, growing at a CAGR of 6.0% from 2012 to 2017. Most of the growth is expected to come from China and India. By 2025, the global construction market is expected to grow by more than 70% to $15 trillion. Currently, 52% of all construction activity is taking place in emerging markets. This percentage is expected to reach 63% by 2025, with China and India contributing most to growth in emerging markets. China's global share will increase from 18% in 2013 to 26% in 2025, despite an expected slowdown. India's share of the global construction market will increase from 4% to 7% by 2025, and will overtake Japan as the world's third-largest market. China's construction equipment market is expected to reach $95.6 billion by 2017, from $59.2 billion in 2012. As Caterpillar is expanding in Asian markets like China and India, it is well-positioned to benefit from the growing construction equipment market in these regions.

In addition, Chinese demand for power and energy will also increase in the next few years. This will drive the sales of power equipment and mining machinery manufactured by Caterpillar. Currently, China consumes around 3.5 MWh of electricity per person per year, compared to 12.5 MWh of electricity consumed per person per year in the U.S. So we can say that the company's strategy to focus on China's market will reward the company with a great profit in a long run.

In the past few years, Caterpillar has made significant acquisitions in China that indicates it holds a long-term view in the country. In July 2011, Caterpillar acquired Bucyrus International, and now offers mining customers the broadest product range in the industry. Bucyrus was the largest acquisition in Caterpillar's history. By acquiring Bucyrus, Caterpillar has established leadership in the mining industry across the world. Similarly, Caterpillar has acquired ERA mining in 2012, which provided it with crucial share in the underground roof support segment of China's mining equipment market. Due to such acquisitions, Caterpillar's market share has increased to 12% in China.

Caterpillar is also attractive for dividend investors. It has consistently paid dividends for the last 20 years. Last fiscal year, the company paid $2.24 in the form of dividends to shareholders. Over the past decade, Caterpillar has increased its annual dividend payment by over 12% per year, which is quite nice. A 12% growth in dividends translates into the dividend payment doubling almost every six years. The company is committed to maintaining a consistent dividend for its shareholders. In 2012, Caterpillar CEO, Doug Oberhelman claimed that, even in the face of a severe recession, "we will never, ever cut a dividend, and we'll grow dividends modestly as we have been." With more than $5 billion in cash, it has the ability to pay dividends for at least 10 years.

Bottom Line

At the moment, Caterpillar seems to be prepared to continue dominating its industry. China and the Asia Pacific region will provide great growth opportunities for all segments of the company's business. Its huge size, presence in China and diversification across the globe are advantages in the long term. It also has a nice dividend yield of 2.30%. In my opinion, Caterpillar is an attractive investment for long-term investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.