Caterpillar (CAT, Financial)’s focus on digital growth and product innovation could improve its competitive advantage.
The construction and mining equipment manufacturer is investing heavily in electric vehicles and autonomous vehicles as it aims to strengthen its customer offering. In addition, it is seeking to differentiate itself versus peers through the release of a variety of digital products that aim to improve the user experience.
Having gained 1% in the last year, the stock appears to offer good value for money based on its long-term growth potential.
Investment in new products
Caterpillar’s increasing investment in the electric vehicle space could lead to improved financial performance. It is set to expand its portfolio of hybrid and battery-powered vehicles, which could align it more closely with changing customer tastes as environmental concerns become increasingly important in a range of industries. For example, its D6 XE track-type tractor will provide up to 35% better fuel efficiency versus the conventional three-speed transmission.
The company’s portfolio of autonomous vehicles could provide it with greater differentiation versus sector peers. It has over 200 autonomous trucks that have together accumulated 30 million miles of autonomous driving. This is more than twice the experience in autonomous operations of any car manufacturer, which suggests the company is well-placed to provide improved efficiency to its customers. Caterpillar has recorded a 30% improvement in productivity on tests using its autonomous vehicles when compared to existing, non-autonomous vehicles.
Alongside autonomous vehicles, new systems such as GRADE Assist on its next-generation excavators help customers to reduce costs. The system automates boom and bucket movement to help the operator to avoid digging too deep and swinging into hazardous areas. Such systems could enhance the appeal of the company’s products in safety-focused industries and provide the company with a competitive advantage versus peers.
Digital growth
The company is aiming to make it easier for customers to buy its parts online. For example, it is improving its digital platform architecture, while investing in a digital division through a newly formed office in Chicago. With the business increasing its number of connected machines by 70% over the last two years, it is now in a strong position to offer improved efficiency to customers through a variety of insights into how an asset is performing.
In the most recent quarter, Caterpillar released a new app that provides real-time data for customers to manage their assets more effectively. For example, the app allows customers to see the location of a vehicle, request parts and see the hours of usage to improve efficiency. The company is also developing a number of other apps in order to differentiate itself from peers. Apps such as CAT Inspect, which reduces the amount of time it takes to undertake vehicle inspections, and VisionLink, which tracks metrics such as fuel consumption and productivity, are set to be released in the near future. They could add greater value to its offering for a wide range of customers through improved efficiency and convenience.
Threats
The continued trade war between the U.S. and China could weigh on the company’s near-term financial prospects. For example, in the most recent quarter a slowing construction industry in China led to a high degree of competition that put pressure on Caterpillar’s market share. This contributed to a decline in the company’s construction sales in the Asia-Pacific region of 4% when compared to the same period of the previous year.
In response, the company is seeking to allocate its capital more efficiently in order to maximize its competitive advantage. Part of this process involves withdrawing from some products where it was not expected to generate acceptable returns. For example, it is withdrawing from vocational trucks and specialized forestry products. It will also ramp up investment in its services offering, seeking to enhance its offering to existing customers throughout the life cycle of its equipment. As well as boosting profitability, this is expected to produce less volatile returns due to equipment usage being more stable over the long run than equipment purchases.
Outlook
The investment it is making in its digital operations, as well as in releasing new products, could further differentiate it from sector peers. Plans to rationalize its product base and focus increasingly on service revenue could lead to less volatile returns, as well as a more efficient business model.
In the next fiscal year, Caterpillar is forecast to record a rise in earnings per share of 5%. Since it trades on a forward price-earnings ratio of 11, it seems to offer good value for money.Ă‚ Having underperformed the S&P 500 by 6% in the last year, the company appears to offer investment appeal over the long run.
Disclosure: the author has no position in any stocks mentioned.
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