Grab This Huge Opportunity

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

If Caterpillar (NYSE: CAT) stumped investors at the MINExpo 2012 with an uncomfortable roll back in guidance through 2015, mega conglomerate General Electric (NYSE: GE) did a somersault by announcing expansion and investment plans at the same event. The big deal: both announcements revolve around the mining sector.

So while Cat cut its 2015 EPS forecast by quite a bit, citing low commodity prices and lukewarm demand, GE is setting up a separate mining division and bracing to acquire companies that will help it achieve its target of $5 billion of mining sales in the years to come. That’s more than double of what it earned from related sales last year, and comes right after it announced plans to take over two mining-equipment makers a couple of months back.

Does Caterpillar know something that GE doesn’t? Can’t be, else it wouldn’t have remained bullish for the long run. So is Caterpillar just being cautious? Seems so. Does it mean I will pause and reconsider my so-far bullish stance on the company? No way! To me, Caterpillar remains just as attractive.  

Crystal Balls? Nah!

Frankly speaking, I feel three years is a really long time to predict in a dynamic global environment, and I don’t expect the market to drown in this outlook cut and not react to any positive news that comes up over the next three years. To put that in perspective, there are actually a lot of things one can look forward to that makes this dip in Cat’s shares look like an awesome buying opportunity.

To start with, coal companies might be down in the dumps and the state of the mining industry not too great, but we have seen this situation for several quarters now. Yet, Cat never disappointed with its numbers despite the headwinds. It, in fact, turned up in its best last quarter with outstanding numbers, stealing the show with a 68% jump in its mining-business sales. Call me names, but I am not writing off coal completely.

Natural gas might be edging it out in electricity generation, but to think that turning coal plants to natural gas powerhouses is a cakewalk is foolish, as it would cost hundreds of billions of dollars. And what happens when nat-gas prices start inching up? Will it still be as attractive? Coal still accounts for nearly 40% of global electricity, China’s coal imports still remain strong, and Europe’s consumption of the fuel is rising rapidly. The fuel has some steam left.

2 key M’s – Mining and the Middle Kingdom

Mining, which is the lifeline for several industries, should pick up sometime soon, and once it does, Cat will rule the roost. The Bucyrus acquisition, which has already taken the company ahead of arch rival Joy Global (NYSE: JOY) in terms of the size of mining product portfolio, should keep adding value in the years to come. Joy, in turn, is getting sandwiched between heating competition and slowing demand. Its bookings slipped 25% while backlog value lost nearly 10% in the third quarter, compelling the company to lower its full-year guidance for the second time this year.

Throw in China’s revival, and you have the perfect recipe that could change Cat’s fortunes. If the company welcomed China’s slowdown, it will worship its bounce back! China is a huge-potential market for Cat’s core businesses -- construction and mining -- and the company is confident it will dominate the market by 2015. Meanwhile, even if China slows down further, it shouldn’t be a big blow as the market accounts for only 3% of Cat’s revenue currently.

Powering the Future

What about the equipment king’s power systems business? It is a sideline business, but could play a bigger role in the years to come. Demand for rail locomotives is likely to go up ahead of stricter emission standards that go into effect in 2015. Following the acquisition of Electro-Motive Diesel (EMD) two years back, Cat has already grabbed some of the locomotive market share from GE, giving the latter stiff competition.

The excitement doubles with Caterpillar’s increased investment in upcoming trends such as use of natural gas as an alternative fuel. It has partnered with none other than Westport Innovations (NASDAQ: WPRT), the company that has mastered the art of making engines run on natural gas. The two together will develop the first-of-its-kind high horsepower natural-gas fuel engines for locomotives, mining trucks and off-road vehicles. EMD will develop the natural-gas locomotives together with Westport. Development programs should begin soon, and if things go as planned, these programs will be more than half-way through by 2015, stepping into commercial production stages. One can only imagine what that would mean if natural gas conversion accelerates in the meantime. Going by Westport’s numbers, the trend already seems to be catching up fast – its last-quarter revenue more than doubled while net losses were cut by one-third compared to the same period last year.  

The Bottom Line

The North American construction markets are already showing visible signs of an uptick, and India might just have laid out the red carpet for buoyed growth with its recent slew of stimulus measures. Not many are expecting China’s government to stay mum for long either. Caterpillar’s expertise and experience in the industry is unparalleled, so is its brand value. Dominant leadership, widening global reach, superb process systems – Cat has too many weapons to shield itself with if things turn dirty. And when you have a CEO who assures you of stable dividends even in downturns, you can’t really question the company’s strength. 

At earnings multiples of under 10 and a dividend yield of 2.3%, Caterpillar is a bargain. Sulk if you are a trader or can’t see beyond some months, but don’t forget to order pastries if you believe in the buy-and-hold strategy. I have initiated an outperform CAPScall on Caterpillar, for I believe the stalwart won’t fail me in the years to come.

Know What You Own

Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in the Fool’s brand new report. Just click here to access it now.


Nehams has no positions in the stocks mentioned above. The Motley Fool owns shares of Westport Innovations. Motley Fool newsletter services recommend Westport Innovations. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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