Caterpillar is a leading global manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. The company operates through Construction Industries (39% of 2019 sales), Resource Industries (17%), Energy & Transportation (38%), and Financial Products (6%) segments. It also provides financing and related services. The company has 125 primary manufacturing facilities across the globe.
Caterpillar has a huge brand portfolio consisting of over 21 well-known brands. Over the last 90 years in service, customers trust Caterpillar for their basic infrastructure, energy, and natural resources needs. The company derives 59% of its revenues from outside the U.S. – Asia Pacific (20%+ of sales); Europe, Africa, Middle East (20%+); North America (nearly 50%) and Latin America (~10%). Caterpillar operates through a network of 168 dealers in more than 190 countries. It has installed over 1.5 million construction machines and built more than 20 million engines globally. Caterpillar is favourably placed to gain from higher demand for oil and gas activities and increased mining production and commodity prices.
- Opportunity Score: 70
- Ticker: NYSE:CAT
- Sector: Industrials
- Industry: Farm & Heavy Construction Machinery
- Market Cap: 85.04B
- P/E: 26.11
- Dividend Yield: 2.62%
- Payout Ratio (Earnings): 68.55%
- S&P Dividend Aristocrat: YES
- Chowder Score: Members Only
- Revenue Growth: Members Only
- Dividend Growth: Members Only
- Dividend Growth Fit: 8/10
- Dividend Income Fit: 7/10
Revenue Growth & Market Exposure
Caterpillar is a leader in almost all of the product classes in the industries in which it operates. With more than 90 years of existence, the company is well-positioned to provide customer-focused solutions throughout the lifecycle of its products. It continues to invest in digital capabilities and enhanced offerings. The company incurs more than 3% of its revenues for R&D activities. Caterpillar’s extensive sales and service network comprises of an independent Cat dealer network with 165 dealers and about 2,300 branches in 191 countries around the world.
Caterpillar offers a broad product range and services to deliver comprehensive solutions for its customers worldwide. The company caters to customers in infrastructure, forestry and building construction, mining, heavy construction, quarry and aggregates, waste and material handling, oil and gas, power generation, marine, rail, and industrial sectors. It is targeting to double its ME&T services revenues to $28 billion by 2026 from the 2016 baseline. Caterpillar’s continuous investment towards expanding its portfolio and introducing new and efficient products should support its top-line growth.
Caterpillar’s second quarter’s sales volume decreased across the three primary segments and all regions.
The company witnessed a revenue decline due to lower sales volume driven by lower end-user demand and the impact of changes in dealer inventories. The company is, however, well-positioned to support its customers doing essential business. It continues to focus on a flexible and competitive cost structure. Caterpillar is anticipating a similar decline in third-quarter end-user demand as in Q2 and is expecting dealers to reduce inventory by $2 billion for the full year. The company withdrew its earnings guidance and did not provide a financial outlook for FY 2020. Caterpillar has grown its revenue at more than 5% CAGR in the last three years.
Caterpillar is a Dividend Aristocrat having paid a quarterly dividend every year since 1933 and increasing them each year for the past 26 years. The company sports an annual average dividend yield of ~3% and a reasonable payout ratio of ~43%. It last raised its dividend by ~20% and has maintained a dividend growth rate of ~10% per annum CAGR in the last decade.
The company returned $0.6 billion to its shareholders in the second quarter and $2.3 billion YTD through dividends and share repurchases. It has, however, suspended share repurchases for the full year. Caterpillar aims to return substantially all free cash flow to its shareholders in the future.
Caterpillar has successfully removed ~$2 billion in structural costs since 2014 by its cost management initiatives and streamlining its manufacturing approach. The company’s dividends are supported by its strong balance sheet and liquidity. It ended the second quarter with $8.8 billion in cash and $18.5 billion in available liquidity resources.
Caterpillar is growing its digital-enabled solutions and aftermarket to increase customer loyalty and strengthen relationships with existing customers. The company continues to prioritize its spending to provide for investment in services and expanded offerings for profitable growth.
Caterpillar faces severe competition from global competitors as well as regional competitors. Examples of global competitors include CASE, Deere Construction & Forestry, Doosan Infracore, Hitachi Construction Machinery, Hyundai Construction Equipment, Cummins, etc. One of the major competitive advantages of Caterpillar is its extensive sales and service network which gives customers reassurance of a reliable global service network. Furthermore, a partnership with Cat Financial enables dealers to offer capital and financing assistance to customers. Services throughout the product life cycle, cutting-edge technology, and decades of product expertise set Caterpillar apart from its peers.
Caterpillar expects Q3 revenues to be lower than the second quarter’s revenue and no improvement in operating margins. The company, however, has a strong financial position and remains favourably placed to serve its global customers even in the current environment. Though Caterpillar operates in a cyclical industry, its long-term earnings growth potential remains strong. The company might face headwinds in the form of slowing customer demand in the near term.
DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.