Written by Summary
Caterpillar is a dividend aristocrat that is currently trading at the lower end of its 52-week range.
The company generated +$7.2B in operating cash flow in 2021 and had +$9B in cash on hand.
The company is fortified to survive economic downturns and is poised to rally once current uncertainties abate.
At current pricing, shares offer upside potential of approximately 20%.
Scott Olson/Getty Images News Caterpillar, Inc. (NYSE: CAT ) is currently trading at the lower end of its 52-week range. As a global manufacturer of construction and mining equipment, the company is a proxy for worldwide economic growth. At present, the outlook is uncertain due to inflationary pressures and geopolitical conflicts. Despite these headwinds, the U.S. economy appears fundamentally strong. In 2021, CAT reported strong customer demand that is expected to remain robust moving forward. Additionally, the company is generating a significant amount of cash flow and is returning a large portion of it to shareholders. At current pricing, shares have an upside potential of approximately 20% for long-term investors who are bullish on the global economy. Business
CAT is the world leader in heavy duty equipment and machinery, which includes construction and mining equipment, off-highway diesel and natural gas engines, and industrial turbines. They operate in three primary segments: Construction Industries; Resource Industries; and Energy & Transportation. Together, these segments are reported as Machinery, Energy & Transportation (ME&T). In addition, they also provide financing and related services through their Financial Products segment, which is stated separately.
Below is the revenue breakout for each segment, as reported in the 2021 annual 10-K filing. In 2021, CAT reported +$51B in total revenue, which was a 22% increase over 2020, with 95% of total sales attributable to the company’s ME&T segment. Within the segment itself, nearly 90% of sales were to the construction and energy/transportation industries. Sales Breakout – Form 10-K From a geographical standpoint, approximately 55% of sales are generated in North & Latin America, with the remaining sales split evenly between Asia Pacific and Europe, Africa, & the Middle East (EAME). Geographical Sales Breakout – Form 10-K The company’s machines are distributed primarily through a worldwide network of dealers. 44 of these dealers were located in the United States and 116 were located outside of the United States as of December 31, 2021. Combined, they serve 193 different countries. Competition
Since CAT’s products and services are sold worldwide, they face intense competition from local and foreign based companies. Direct competitors include Komatsu and Hitachi, both of which are Japanese conglomerates. JCB is also a major competitor, but they are privately held.
Below are the comparisons of each competitor, available in Seeking Alpha’s peer comparison tool, in terms of market cap and the number of employees. Of the three competitors listed, Deere is the most comparable from a size standpoint. Even though the company operates primarily in the farming industry, they are relatable in their heavy-duty product offerings. Since Komatsu and Hitachi are foreign based companies and considerably smaller, the comparisons are not as useful, but they are included, nevertheless. Seeking Alpha CAT has significantly underperformed Deere over the past year, but the stock still has performed well over the long-term. From a valuation standpoint, however, CAT appears to trade at a discount to Deere. It’s forward P/E of 16.5x is less than 17.2x reported for Deere. In addition, it is also lower than their five-year average of 18.1X. Furthermore, the EV/EBITDA multiple appears to be at discount to Deere, though it is higher than their two foreign peers. Seeking Alpha Seeking Alpha Overall, the company has underperformed and is down along with the broader market. CAT is a component within the DJIA, while Deere is not. As such, some of the downward pressure can partly be attributable to index-based selling. Additionally, since CAT is a greater proxy for global economic growth, underperformance can also be linked with a pessimistic outlook as a result of inflationary pressures, rising rates, and geopolitical upheaval. Competitive Advantages
CAT has been in business for nearly a century, and their customers are virtually everywhere. They have over 300 products that set the standard in various industries. Overall, there are four million CAT products at work around the world, approximately one million connected assets, and twenty million engines that have been built using CAT labor.
In addition to their scale and leading industry experience, another competitive advantage is their independent dealer network. With 160 dealers and 2,400 branches or facilities, it’s the most extensive sales […]
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