From where I stand, Caterpillar Inc. (CAT) is a strong buy. Despite the rickety nature of the capital goods market, it has performed outstandingly well, signaling its ability to operate under mounting pressure. Similarly, it towers over its competitors and currently assumes the role of an industry leader. Nonetheless, I am not delving into the nitty-gritty of how Caterpillar has an indescribable edge, I am simply looking at three known - yet commonly overlooked - reasons that make Caterpillar a definite buy.
The Chinese market
Although the Chinese market represents a mere 3 percent of Caterpillar's collective revenue, it should not be overlooked. In fact, it presents a lot of prospects as far as Caterpillar's long-term future is concerned. Critics may argue that the current slowdown in the Chinese market stamps out hope. While this is partly true, it doesn't necessarily hold. As noted earlier, the Chinese market represents only 3 percent of Caterpillar's total revenue.
The slowdown in China, therefore, has a more evident material effect on local bigwigs like Sany Heavy Industry Co Ltd. This is clearly demonstrated by the 28 percent dip in Sany's net profit in Q2, representing the biggest fall since the year 2008. In fact, Sany is currently seeking a covenant waiver on $510 million debt in light of a terrible bottom line.
What happens if stimulus kicks in? If stimulus kicks in, Caterpillar will be in a better position compared with Sany and other locally-based heavy machinery makers. Why is this so? While competitors like Sany try to patch things up, Caterpillar will use the money it has made from other potent markets to take the lead.
This advantage, coupled with President Hu Jintao's stimulus plan that involves the go-ahead for sixty infrastructure projects, spells a lot of hope for Caterpillar. In fact, Caterpillar has noted that the stimulus will help in 2013, citing that the economy will recover later in the year or early next year.
China is an incredibly potent market. Opportunities are plenty for bigwigs like Caterpillar. I believe that once the country's economy gets back on its feet, China will be a core contributor to the current 52 percent (and expected to increase) international revenue that Caterpillar capitalizes from emerging markets.
Size matters
Back at home, American machinery makers and conglomerates don't extend that much competition to Caterpillar, highlighting the one unwritten law - size matters. While size cannot be an exclusive base of argument, it holds much weight - especially so in Caterpillar's primary industry of producing capital goods.
Caterpillar's strong financial muscle does nothing to level the playing ground. It is more likely to land priority projects when compared to competitors. The table below gives a sneak peek of some of the indicators of superiority as far as finances and size are concerned:
Caterpillar CAT | Volvo Ab VOLVY.PK | Komatsu Ltd KMTUY.PK | CNH Global CNH | |
Revenue | 66.31B | 49.21B | 24.97B | 20.12B |
Quarterly Revenue Growth | 0.22 | 0.06 | -0.05 | 0.02 |
Net Income | 5.97B | 2.66B | 1.83B | 1.09B |
Earnings Per Share | 8.94 | 1.31 | 1.91 | 4.53 |
Market Cap | 60.86B | 29.30B | 20.90B | 10.36B |
Note: Currency is in USD
From the figures in the table, it is clearly evident that Caterpillar's dominance trickles all the way from its market cap to key metrics such as quarterly revenue growth. While competitors like Komatsu Ltd (KMTUY.PK) deal with reversed fortunes, Caterpillar fights the slowdown in the industry and posts - albeit little - the highest quarterly revenue growth (more than 100 percent higher than its competitors).
The only formidable competitor appears to be Volvo Ab (VOLVY.PK). Notwithstanding, I don't believe that it can fully measure up in the lucrative international market. Caterpillar has an exceedingly big footprint in the global scene.
Expanding into relevant fields
This article couldn't be complete without mentioning the Bucyrus International acquisition. It's now been one year since the acquisition took place and the dust is slowly settling. This acquisition places Caterpillar in a lucrative segment and further secures its position as far as the global front is concerned
Why is this so? The mining industry in particular will be a sure moneymaker over the next few years. This is because it will be instrumental in fueling the bulging demand of the ever-growing global middle class.
All this, coupled with positive estimates like a 17 percent growth each year on the current 2.4 percent yield over the next five years, spells a lot of hope for long-term investors. Caterpillar is the place to go if you want to make big money in the long haul.
