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Caterpiller Inc.: Growing Value in Spite of Decreasing Demand
Posted by: Muhammad Bazil (IP Logged)
Date: March 26, 2014 11:16AM

Caterpiller Inc. (CAT) released a surprisingly strong fourth quarter report for 2013, helping the company recover from its relatively disappointing third quarter results which had been hampered by a dramatic decrease in the demand for mining equipment. The per share earnings on the stock in this last quarter were $5.85 which greatly exceeded the analysts' original estimates of $5.78. In an attempt to maintain this momentum, the company has laid out many plans for restructuring and increasing the efficiency of operations in the coming year.

Risks and Obstacles to Potential Growth

Caterpiller is withstanding its fair share of pressure from the declining economy, resulting in the need to make some tough decisions and reposition itself to be better able to endure. The major problem the company is facing is declining global demand for mining equipment. The company had already been prepared for this decline in 2013, but it turned out to be even worse than expected. In 2014, Caterpiller has set in motion a comprehensive restructuring plan that will cost approximately $400 million to $500 million.

Other more general economic issues that could lie ahead for the company include whether or not congress will manage to agree to raise the debt ceiling. In recent months, the company has been working on convincing the government to increase its expenditures on improving infrastructure. But if congress fails to raise the debt limit, this could put an end to those dreams.

In the global market, Caterpiller is feeling some pressure from a stagnating Chinese economy. Investments in manufacturing have slowed and the Chinese yuan is decreasing in value. If the Chinese market fails to meet the 7.5% growth target expected for 2014, Caterpiller’s stock will undoubtedly suffer the consequences.

Furthermore, Caterpiller’s push for Congress to approve more spending on national infrastructure could fail to boost the company as high as expected. The company has already recently lost a major locomotive contract in its home state of Illinois valued at over $200 million for the production of 32 high-speed trains representing the U.S.'s first attempt to establish high-speed public transport similar to that already in place in Europe and Asia.

Reorganization and Reasons for Optimism

Although we cannot deny or reason away these coming impediments to the company’s growth, there is still room for optimism from the company’s surprisingly successful fourth quarter results and its acute awareness of the potential risks it may face in 2014.

As the company has reiterated many times, it has put in place big plans for reorganizing and increasing its efficiency. Such cost-cutting strategies were a significant contributor to the exceptionally high profits the company saw in the last quarter. In response to its recent success and anticipation of future growth, Caterpiller has announced a $10 billion share buyback plan for the coming year while expressing optimism about the ability for global markets to start seeing promising levels of growth.

While demand for mining equipment is expected to continue declining, Caterpiller’s other major sources of revenue should be able to fair much better. Analysts are expecting to see worldwide growth in the sales of manufacturing equipment and agricultural machinery in 2014 and 2015.

Conclusions

Analysts are predicting that the company’s stock could reach as high as $122 per share this year. This estimate coupled with the company’s continuing cost-cutting strategies, extensive $10 billion share buyback plan, and restructuring to account for declining sales of mining equipment make Caterpiller a potentially very profitable buy at its current market price of $95.61 (as of market close on March 13). However, investors should continue to be wary of the potential consequences of a slowing Chinese economy and a polarized U.S. congress which has earned itself a reputation for being unable to agree on the debt ceiling in the past.



Stocks Discussed: CAT,
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