When times are bad, they can be very bad. When times are good, they can be very good. Many people fail to follow the cycles that business brings. When a company is down and out, those who are smart stick with it if there are fundamental ties to the economic cycle. When that company flies, these same people profit handsomely. In the world of heavy equipment, this is about as true a statement as there could ever be.
Caterpillar Inc., a heavy equipment and finance company, offers every aspect of owning/operating a piece of heavy equipment. Generally, one might associate Caterpillar with those huge yellow vehicles seen at major civil engineering projects, but there is quite a bit more to the company then these outward signs might indicate. This hugely profitable (8% at 4th quarter 2007 end over 2006) company offers almost every service available for buying and maintaining its equipment products. Its finance arm earned over $348 million during this same period and found its engine division becoming one of its most lucrative. Add to that the company’s rebuild and other services to its exceedingly profitable international sales division, and it’s no wonder that the last two years have been record breaking earnings years.
For the most part, the company has benefited from the weak US dollar. International sales have been astounding as China and other industrializing countries demand more equipment to mine and scrape their surfaces. The company has recently announced that, in the next three years, it will invest over $1 billion in these countries, with China being the largest recipient. Oddly, the equipment and finance portions of the company are only equal contributors to the company’s current and long term outlook. The engine component of the company, with rail and engine turbine products at their core, is turning out to be a stellar performer. The company’s recent purchase of Progress Rail brought in revenues of $775 million and appears to be on track with a solid backlog of orders.
The company is truly hitting on all cylinders and sees very little downside for the next several years. Though the company typically tries to avoid it, there may be a small price increase in products at mid-year due to raw material issues, but this is considered minor in scope. US sales may also be on a slower curve at the moment but internationally, the company is only hitting second gear and sees 5-10% growth for 2008 as a fairly realistic expectation. The company is fairly pragmatic about its current situation but by all accounts is ready for as much growth as it can reasonably handle.
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