Mining for Returns - Look No Further Than This Manufacturer

Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The troubled economic outlook in Europe and the Americas isn't good for any industry. While no industry would benefit from a contract in demand due to lesser disposable income, there's certain sections of the market that are insulated as far as consumer spending goes. But these same industries aren't particularly insulated when it comes to a contract in demand from other companies or Governments. Industrial equipment manufacturers often get hit hard when corporate and Government demand slows. But there are opportunities for construction everywhere, you would argue. Or mining. That's true. So these companies will still have good demand for their services.

Caterpillar (NYSE: CAT) is now the leading manufacturer of original mining equipment throughout the world, and the merger with Bucyrus has given it a strong foothold in China and India. In a world where the demand in the west is low, companies have started looking east for business and currently India and China along with the rest of Asia seem to be fairly promising for these companies. The merger will also allow it to significantly leverage Bucyrus' booming aftermarket part business while providing support and services for its own equipment

Other equipment manufacturers too are eyeing Asia. Volvo AB (NASDAQOTH: VOLVY) will invest $692 million in India over the next few years, the chief executive of the Swedish maker of heavy vehicles said earlier in the month. Of this, 18 billion rupees will be invested in the company's joint venture with India's Eicher Motors Ltd. , Olof Persson told reporters. The remaining investment will be in the company's own operations, he added. Volvo is eyeing the growing demand in India which is building cross-country highways, ports, airports and railway lines to bolster growth in an economy. The government expects investments of up to $1 trillion until 2017 in the infrastructure sector. Not a bad time to enter the market and get a share of that pie. 

CNH Global (NYSE: CNH) is another company that is making its foray into Asia through CNH International, which is a wholly owned subsidiary of CNH Global (in which FIAT has an 89% stake). The company, a world leader in the agricultural and construction equipment businesses has signed a distribution and service agreement with DKSH Group, Asia's leading market expansion services provider, to sell and support New Holland Agriculture equipment in Vietnam. DKSH Vietnam will provide sales, after-sales, marketing, and customer services, leveraging on the extensive infrastructure supporting its well-established and diversified business portfolio.

But there are quite a few reasons to stick with Caterpillar. One of the key things that catches your eye with caterpillar is the strong 48.9% quarterly earnings growth rate. The company's focus on expanding by opening up new facilities in emerging markets will help provide new streams of future revenue and growth which is enhanced by the fact that it still has a substantial backlog of roughly $23 billion. The company has a five year dividend growth rate of almost 6% and a low dividend payout ratio of 19%, which leaves further scope for increasing the dividend. The value payout to investors is good with 3-5 year projected EPS growth rate of 11.8%. It has much higher operating margins than its competition (including Volvo and CNH International) and its operating margin of 14% is twice as high as the industry average of 7%. In addition the company has a healthy 5 year EPS growth rate of 10%.

The merger with Bucyrus has made it the leading mining original equipment manufacturer on the globe. This acquisition helps Caterpillar gain a strong foothold in strong mining markets such as China and India. It will also be in a good position to leverage Bucyrus' thriving aftermarket parts business while providing supporting services for its own equipment. This will be one of the cornerstones of the company's performance in the coming years.


ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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