Monday, September 10, 2007

Heavy Equipment: The Case for Caterpillar....

Caterpillar, the golden nugget of heavy equipment makers in the United States, faces strategic change, which has some investors running for the hills. The recent housing slump, which continues to slow construction projects, pushed Caterpillar's (CAT) profits down 21% in the recent quarter (Fortune).

Although there are concerns surrounding the company's disgruntled employees and struggling world growth (specifically in Japan and China), I feel CEO Jim Owens is taking the necessary steps to avoid a major downturn.

According to Fortune Magazine, "despite the falloff in North American business this year, Owen's hasn't cut his forecast of a compound annual growth rate of 15% to 20% for the rest of the decade, with $60 billion in sales possible by 2010."

Leading a large corporation through major strategic change is no easy task. However, Owen's continues to move forward as evidenced by the implementation of a process known as the "Caterpillar Production System," (CPS) which hopes to speed inventory turn times more than 40%, and boost productivity 20% by 2010.

Simply put, the world moves at an incredibly fast rate, and neither Caterpillar nor it's customers can afford to stash millions of dollars aside waiting 4-6 months for machinery. Recently, companies such as Japanese heavy equipment maker Komatsu, offering 10% to 20% discounts, continues to take market share overseas, forcing Caterpillar to rethink global operations.

Company employees remain frustrated with the changes because slow suppliers continue to hinder production at home, which may be the main cause for slowing operations. I guess the main question is this: Will Caterpillar meet or exceed the expectations that CEO Jim Owen's has set for the company?

Personally, I think they will. Initially, increased competition overseas cut into market share, but Caterpillar has pulled even with Komatsu in China, and plans to triple its product offerings over the next three years (Fortune). Moreover, the companies production line initiatives should turn inventory much faster, which will clean up the balance sheet and generate more cash for other operations and investments.

Sales in the United States will lag in the short term, but overseas sales should improve, which will stabilize the companies financials until the housing market turns. Although it could be a while before Caterpillar realizes its full potential, a small investment at $73 a share seems reasonable. After all, CEO Jim Owen's sees potential sales of $100 billion by 2020 (Fortune).

Recommendation: Buy and hold Caterpillar for the long term

I currently do not own shares of this company

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