Caterpillar (CAT) had an amazing year in 2011, posting its all-time high revenue and earnings driven by aggressive growth in the emerging markets. The strong results were driven by three main factors. First, increased food demand in the emerging markets increased food prices which in return helped farmers buy better farming equipment. Second, many emerging markets are still experiencing construction booms and they need a lot of construction equipment. Third, high material costs resulted in high profits for the mining companies, which in turn bought new equipment to improve their existing fleets.
CAT's Growth in 2011
As a result, CAT's revenue growth was 41% (up from $42.58 billion to $60.14 billion), earnings growth was 78% (up from $4.15 per share to $7.40 per share) in 2011 compared to 2010. The company surprised all its analysts in a good way. It also raised its outlook for 2012 and the company expects very high growth rates this year as well.
CAT's Growth Culture
CAT has one of the most aggressive growth cultures in the corporate world. The company usually plans many years ahead and invests for growth that will come perhaps a decade later. Even during recession that started in 2008 and (technically) ended in 2009, the company continued to invest aggressively in growth related projects. In the last couple years, these projects have been paying off greatly, and this motivates the company to be even more aggressive about its growth orientation.
In 2011, the company built multiple new factories, increased production portfolio of the existing factories and introduced 50 new products in the market. Also, the company opened many new dealerships and increased the number of staff in the existing dealerships.
The company already has some set goals for the year 2020, and these goals are named Vision 2020. The first step of the Vision 2020 is to figure out what the clients need today and what they will be needing between now and 2020. After all, if the company builds hundreds of new products that no one needs or wants, it will not see growth no matter how amazing its products may be. The company has to conduct research and figure out the trends that are likely to occur in the short and long term. This research was already conducted by the management team as a part of Vision 2020 project.
World population keeps expanding, and previously poor countries are getting wealthier each year. New markets are opening and these new markets have a lot of needs they didn't have before. Now, as the developing nations get wealthier, they realize the need for new roads, schools, infrastructure, more variety in food, more clean water, better sources of energy, and bigger, nicer houses. These will require a lot of materials and help continue the boom in materials and in the mining industry. Similarly, all these construction projects will require a lot of equipment as well. These developments represent the three areas (mining, construction and farming) CAT's products have been serving greatly.
CAT's Growth Prospects
In the short-term, CAT will continue to see the strong growth similar to what it experienced in 2011. The company's recent acquisitions of Bucyrus and MWM will continue to contribute to the company's growth story. Bucyrus was a big player in the mining industry, providing mining companies with large equipments. The company was well-respected in the mining industry with a strong client base. By acquiring Bucyrus, CAT also acquired its large client base. Also, Caterpillar and Bucyrus were selling products that complemented each other and now the two companies will be able to serve the customers more efficiently. Bucyrus' expertise and history of 125 years in developing mining equipment will definitely help CAT in a big way.
CAT's second big recent acquisition, MWM, was a German company with expertise in power generating solutions. The company's power-generating products using gas and diesel were particularly successful, and these products now serve CAT's Electric Power Division, which continues to see solid growth. Earlier, a lot of CAT's clients had been asking for gas and diesel-operated power generating tools, and now the company is able to deliver them. This acquisition fits well with the company's quest to figure out what clients need in order to meet those needs.
The company is seeing absolutely no demand problem at the moment. In fact, the biggest issue in front of the company is too much demand. The company had to extend many delivery dates in 2011 and early 2012, and it will have to extend its production capacity further this year in order to meet the demand. CAT plans to accomplish this by communicating better with its suppliers and ramping up its production capacity. By 2012, the acquisitions made by CAT will be fully integrated, and this will create further growth opportunities for Caterpillar.
Currently the company is enjoying a P/E ratio of 14. This is one of the lowest P/E ratios among the blue chips. In the next 5 years, the company's earnings are expected to grow at an annual rate of 21%. This gives us a forward P/E ratio of 11 by the end of this year, 9 by the end of 2013 and 7 by the end of 2014. Given the company's average P/E ratio has been 18 in the last 10 years, the company's market value can easily double between now and 2014.
I like how CAT's management is very aggressive about growth. The company's management is constantly investing more in order to make the company more profitable. There is a lot of demand ahead for CAT, and the company is very good at watching the trends and repositioning itself accordingly. I believe that CAT will continue to surprise the analysts by posting strong growth for years to come. The only issue I have with CAT is that its dividend yield is only 1.7%, and selling covered options for this stock usually doesn't result in high yields either. Other than that, I believe CAT is one of the best investments out there.
Disclosure: I am long CAT.