Should Investors Dig Up This Industrial Giant?

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

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As the 2012 year draws to a close, I would pinpoint on a leading manufacturer of construction and mining equipment, Caterpillar (NYSE: CAT).

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Strengths:

  • Stable Revenue Growth: In 2006, Caterpillar reported revenue of $41.5 billion; in 2011, the company announced revenue of $60.1 billion, representing year over year annual growth of 7.69%, this trend is highly anticipated to sustain into the future with projections placing 2016 revenue at $102.2 billion

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  • Dividend: Currently, Caterpillar pays out quarterly dividends of $0.52, which annualized puts the dividend as yielding 2.35%
  • Historically Low Valuation: At the moment Caterpillar carries a price to earnings ratio of 9.06, a price to book ratio of 4.40, and a price to sales ratio of 0.95, all of which point to a company carrying a reasonable valuation; Caterpillar is currently trading with a historically low price to earnings ratio

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  • Institutional Vote of Confidence: 63% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Cash & Equivalents: At the moment Caterpillar possesses about $5.7 billion of cash and cash equivalents on their balance sheets, a major upside to the business

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  • Magnitude: Caterpillar is valued $57.94 billion, employs 129,113, and with this magnitude comes a certain level of predictably and certainty

Weaknesses:

  • Debt: Currently, Caterpillar possesses about $26.5 billion of debt on their balance sheets, a major downside to the business

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  • Extreme Cyclical Nature: Caterpillar is highly linked to economic activity, and is by no means a recession proof business, and this weakness results in the company experiencing significant pain in times of economic downfall; the chart below displays the pain experienced by the company in times of United States recessions

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  • Operating Expenses: As a company expands, so does the costs related to operating that company, however over the past 10 years operating expenses have nearly outgrown revenues, an ominous sign

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  • Tight Margins: At the moment Caterpillar possesses a net profit margin of 8.19%, which is rather tight and leaves little room for unexpected expenditures

Opportunities:

  • Growth in Mining Equipment Market: Caterpillar’s largest segment in their business is resource equipment, and this market is poised to grow substantially into the future, boosting Caterpillar revenue

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  • Gaining Market Share: Caterpillar is constantly innovating its technology in an attempt to capture new customers, and any gain in market share in the mining and construction equipment industry would lead to a slight boost in revenue

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  • Acquisitions: On July 8, 2011, Caterpillar completed its acquisition of Bucyrus International Incorporated for $8.8 billion, and further acquisitions in the future are very likely and should fuel growth into the future
  • Dividend Growth: Since implementing their dividend program in 1914, Caterpillar has consistently raised their payouts; this trend is widely anticipated to sustain into the future

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  • China: The government in China has invested billions into investing in the country’s infrastructure, and has fueled growth for Caterpillar in the past years, and should continue to do so into the future (Asia-Pacific 2011 Revenue: $14.99 billion 2010 Revenue: $10.32 billion)

Threats:

  • Competition: While Caterpillar is a leader in the mining and construction equipment industry, there is significant competition to offer the best product for the least amount of money, which can lead to margin compression
  • Sluggish Economic Landscape: In an global economic landscape riddled with such uncertainty and stagnation, companies, especially in the construction industry, are less willing to invest money in new equipment, hurting Caterpillar’s revenue
  • Fiscal Cliff: If the United States was to fall off of the fiscal cliff, tax rates would be raised on all Americans, hurting businesses, and in turn hurting Caterpillar

Competition:

Major publically traded competitors of Caterpillar include Deere (NYSE: DE), Joy Global (NYSE: JOY), and Cummins (NYSE: CMI). All of these companies offer industrial products that rival Caterpillar’s offerings. Deere is valued at $33.64 billion, pays out a dividend yielding 2.12%, and carries a price to earnings ratio of 11.36. Joy Global is valued at $6.62 billion, pays out a dividend yielding 1.12%, and carries a price to earnings ratio of 8.70. Cummins is valued at $20.41 billion, pays out a dividend yielding 1.86%, and carries a price to earnings ratio of 11.18.

The Foolish Bottom Line:

Caterpillar is a highly cyclical company that should benefit from any economic growth, however at the moment there is little. The company possesses solid revenue growth and a growing dividend. Caterpillar is a dominant force in the industry it operates in, and should experience growth from the Chinese market. All in all, Caterpillar is a tremendous industrial play that will prosper as the global economy expands over the coming decades. 


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of Cummins and Joy Global. Motley Fool newsletter services recommend Cummins. 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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