A Few Reasons Why I Am Bullish On Caterpillar

| About: Caterpillar Inc. (CAT)
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The year 2013 was a challenging year for Caterpillar (NYSE:CAT) due to weak demand for its mining and construction equipments. Still, it was able to make a reasonable profit in each quarter. Recently, the company announced its fourth-quarter results. Caterpillar reported fourth-quarter profit of $1 billion, or $1.54 per share, up from $697 million, or $1.04 per share, a year earlier. Revenue decreased 10% to $14.4 billion from $16.08 billion. Analysts were expecting earnings of $1.28 per share on revenue of $13.6 billion.

Caterpillar is rapidly expanding its operations in emerging markets, as its main goal is to capture more market shares in emerging markets. The company wants to win the competitions in Chinese mining and construction market, and to become more competitive in India. Currently, it generates a small portion of its total revenue from China. Due to increasing globalization and urbanization, China becomes the most profitable market in the world for companies like Caterpillar. Over the past few years, the company is increasing investments in China that indicates it holds a long-term view in the country.

Due to slowdown in the U.S. and European economies, emerging markets like China and India will play a large role in the growth of Caterpillar's revenue over the next few years. The company needs these markets to grow, because the competition in developed and mature markets is tougher. To gain market share in China, it acquired Zhengzhou Siwei and Shandong Engineering Machinery Co., both are leading providers in the industries they operate. Similarly, Caterpillar acquired Bucyrus International in 2011, the largest acquisition in the company's history. By acquiring Bucyrus, Caterpillar established the leadership in the mining industry across the world.

Currently, 50% of China's population live in cities while this percentage is 80% and 82% in the UK and the US, respectively. China plans to move more than 250 million people from the farm to the city in the next dozen years. Urbanization will require massive investment infrastructure and other kinds of construction that will drive demand for the heavy machinery and other goods made by U.S. industrial companies like Caterpillar. By 2025, Global construction market is expected to grow by more than 70% to $15 trillion. China, India, and the United States are expected to account for nearly 60% of that growth. Currently, 52% of all construction activity is taking place in emerging markets such as China and India, this percentage will increase to 63% in 2025. China's share of the global construction market will rise from 18% in 2013 to 26% in 2025. The construction equipment market in China is estimated to reach $95.6 billion in 2017 from $59.2 billion in 2012.

Caterpillar's expansion in China will reward them with a great profit in a long run. This can be clearly seen in the company's full year 2013 results. During the year, overall sales in Asia/Pacific declined, but sales in China increased. Total sales in China in 2013 were about $3.5 billion, up more than 20% from 2012. The increase was due to both favorable impacts of dealer inventory changes and increased dealer deliveries to end users.

Beside China, India is also expected to see a rise in urbanization and middle class households. By 2025, India will overtake Japan as the world's third-largest market. The country's global construction market share will increase from 4% in 2013 to 7% in 2025.

Along with construction equipments, Caterpillar also sells mining equipment. Mining equipment is the most profitable product to the company. Iron ore and coal demand is rapidly growing in China and India, that will help to drive growth in sales of mining equipment. In the next five years, mining industry revenue is expected to increase at the rate of 8.5% per year to $667.5 billion in 2018. The global mining equipment market will increase from $71.5 billion in 2012 to $117 billion in 2018.

Bottom Line

Caterpillar is rapidly expanding its operations through acquisitions. Its huge size, presence in China, and diversification across the globe will provide great growth opportunities in the long term. Strong expected economic growth in emerging markets like China and India will help the company to increase its global market share. In my opinion, Caterpillar is still an attractive long-term investment.

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.