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Caterpillar Inc (NYSE:CAT) has signed an agreement with Westport Inc (NASDAQ:WPRT), a global leader in natural gas powered engines, to co-develop natural gas technology for Caterpillar's engines. The company will incur R&D costs under the agreement, and the commercial production is expected to start within the next five years. It competes with other global industrial equipment and engine manufacturers such as CNH Global NV (NYSE:CNH), Komatsu (OTCPK:KMTUY) and Volvo AB (OTCPK:VOLVY).

We currently have a Trefis price estimate of $108 for Caterpillar's Stock, which is 20% above its current market price.

Enhanced customer offering to provide a competitive advantage

Natural gas offers a significant price differential compared to diesel, which is presently used in the majority of Caterpillar's engines, and therefore Caterpillar's clients stand to benefit from fuel cost savings with natural gas-powered engines. Moreover, the natural gas powered engines are targeted to offer similar levels of operational effectiveness as diesel engines. Hence, the combination of lower cost and similar levels of operational effectiveness would provide a significant competitive advantage to Caterpillar.

Also, upgrading its older diesel-powered engines in several applications to natural gas-powered engines may bring added revenue to the company. The agreement will initially focus on developing a natural gas fuel system using Westport's High Pressure Direct Injection (HPDI) technology for Caterpillar's engines used in mining trucks and locomotives. The companies will also develop a similar technology for Caterpillar's off-road engines used in a variety of applications such as industrial, marine, petroleum-drilling, among others.

A competitive advantage in connection with emissions standards compliance

Regulatory emissions standards of the US Environmental Protection Agency (EPA) and similar standards in other developed economies have forced the industrial companies, including Caterpillar, to invest heavily in R&D aimed at reducing air emissions. The agreement with Westport will go a long way in addressing these regulatory concerns and also provide Caterpillar a competitive advantage, particularly in the U.S. and E.U. markets, in connection with emissions standards compliance.

Disclosure: No positions

Source: Caterpillar Partnership With Westport Will Provide A Competitive Advantage