netrashetty
Netra Shetty
Caterpillar Inc. (NYSE: CAT), also known as "CAT", designs, manufactures, markets and sells machinery and engines and sells financial products and insurance to customers via a worldwide dealer network.[2][3] Caterpillar is the world's largest manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines.[2] With more than US$7 billion in assets, Caterpillar was ranked number one in its industry and number 44 overall in the 2009 Fortune 500.[6] Caterpillar stock is a component of the Dow Jones Industrial Average.[7]
Caterpillar Inc. traces its origins to the 1925 merger of the Holt Manufacturing Company, the inventor of the crawler tractor, and the C. L. Best Tractor Company, creating a new entity, the California based Caterpillar Tractor Company.[8] In 1986, the company re-organized itself as a Delaware corporation under the current name, Caterpillar Inc.[3] Caterpillar's headquarters are located in Peoria, Illinois, United States.[1]
Caterpillar machinery is recognizable by its trademark "Caterpillar Yellow" livery and the "CAT" logo.[9]
the leading manufacturer, by revenue, of engines and turbines used in machinery, electric generators, highway and non-highway trucks, and seaborne vessels.
During the eight years before 2009, CAT has seen unparalleled growth, largely on the back of a booming U.S. construction market, higher petroleum exploration and production, and growing demand for its equipment overseas. Caterpillar still managed to post record sales and profits during the 2007 subprime lending crisis, due to demand for infrastructure in emerging markets. Caterpillar posted record sales in 2007, which collapsed and moved in the red by 2009.[1] The global economic slowdown and commodity price collapse caused demand for mining machinery to dip below 2007 levels during the fourth quarter of 2008.[1] The company has increased in presence in several key regions such as China, which has seen unprecedented wealth growth and has a huge appetite for energy.
Though dependent on the declining US housing construction market, Caterpillar has diversified its sales internationally, aided by the global boom in infrastructure development.
Company Overview
Caterpillar is well-known throughout the world for its iconic large yellow machines.
With nearly 95,000 employees, Caterpillar's global footprint spans six continents and boasts the highest worldwide sales of its competitors. In addition to manufacturing and selling machines and engines, Caterpillar also provides financial products to its customers. Its three main businesses generated $7.5 billion in 2010, but have been hit hard by a collapse in commodity prices.[2]
Contents
1 Company Overview
1.1 Business Segments
2 Business Financials
2.1 Quarterly and Annual Financial Updates
2.1.1 Q4 FY2010 Quarterly and Annual Earnings
2.1.2 Q3 FY2010 Quarterly Earnings
2.1.3 Q2 FY2010 Quarterly Summary
2.1.4 FY2009 Annual Earnings Summary
3 Trends and Forces
3.1 The success of Biofuels may enhance agricultural equipment sales
3.2 U.S. Environmental Legislation and international green movements could decrease or increase demand for Caterpillar's equipment
3.3 Obama's Presidential Policy features explosive infrastructure spending which could increase demand for Caterpillar equipment
3.4 Increasing Demand in the Developing World Offers Market for Business
3.5 The Recovery of the US Housing Market Will Determine Future Financial Performance
4 Competition
5 References
Business Segments
The company has 3 primary segments: Machinery, Engines, and Financial Products. In 2008, Machinery and Engines accounted for 88% of the company's profit. Financial Products accounted for 12%.
Machinery: the design, manufacture, marketing and sales of construction, mining and forestry machinery—track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, skid steer loaders and related parts. Also includes logistics services for other companies and the design, manufacture, remanufacture, maintenance and services of rail-related products.
Engines: The design, manufacture, marketing and sales of engines for Caterpillar machinery; electric power generation systems; on-highway vehicles and locomotives; marine, petroleum, construction, industrial, agricultural and other applications; and related parts. Also includes remanufacturing of Caterpillar engines and a variety of Caterpillar machine and engine components and remanufacturing services for other companies.
Financial Products: Cat Financial provides a wide range of financing alternatives to customers and dealers for Caterpillar machinery and engines, Solar gas turbines as well as other equipment and marine vessels. Cat Financial also extends loans to customers and dealers. Cat Insurance provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment. Cat Power Ventures is an investor in independent power projects using Caterpillar power generation equipment and services. [3]
Business Financials
Quarterly and Annual Financial Updates
Q4 FY2010 Quarterly and Annual Earnings
Caterpillar announces revenues of $42.6 billion for the 2010 fiscal year, a 31% increase from $32.4 billion in 2009.[4] Profit similarly increased in 2010 to $2.7 billion, up from $895 million in 2009.[4] Fourth quarter revenues and profits were also up when compared to year-ago results. Revenue for the fourth quarter was $12.8 billion, an increase of 62% from fourth quarter earnings in 2009.[4] Fourth quarter profits were up by 317%, totaling $968 million, an increase from $232 million in the fourth quarter of 2009.[4] Increased demand, production, and efficiency drove these gains.[4]
Q3 FY2010 Quarterly Earnings
Caterpillar announced revenues of $640 million for the third quarter of 2010.[5] These revenues represent a 5% or $36 million decrease in revenues from the third quarter of the previous year.[5] Profit for the third quarter also decreased when compared to year-ago results. Q3 profit decreased by $3 million to $73 million for the quarter.[5] Losses were driven primarily by decreased earning assets and lower interest rates, both of which totaled $104 million in losses for Caterpillar in the third quarter.[5] Profit, however, increased as compared to year-ago results. Profit for the third quarter was $89 million as compared to $80 million the previous year.[5]
Q2 FY2010 Quarterly Summary
Caterpillar announced a profit of $707 million for the second quarter of 2010, a 91% increase from year ago results[6] This profit was driven by a 31% increase in sales and revenues which totaled $10.4 billion for the quarter, an increase of $2.4 billion from $7.9 billion in the second quarter of the previous year.[6] Sales volume primarily helped drive growth in the second quarter of 2010, increasing by $2.3 billion for the quarter.[6]
Machinery and Engine sales increased by 34% for the quarter culminating at $9.7 billion as compared to $7.3 billion in year ago results.[6] Financial products revenues, however, decreased by 5% to $686 million from $721 million the previous year, partially offsetting total quarterly sales and revenues.[6]
FY2009 Annual Earnings Summary
Caterpillar posted revenues of $32.4 billion for 2009, a 37% drop from $51.3 billion in 2008.[7] Profit per share similarly dropped by 75% for the fiscal year.[7] Fourth quarter results were also down compared to year-ago postings with sales and revenues dropping 39% to $7.9 billion and profit per share dropping 67% to $0.36.[7] Caterpillar experienced drops across the board in its machinery and engines sales and its financial products revenues.[7] Machinery and Engines Sales fell by 41% to $7.2 billion in FY2009 as compared to $12.1 billion in FY2008.[7] Financial Products Revenues fell from $803 million in FY2008 to $705 million in FY2009, a drop of 12%.[7] Profits for the quarter also fell by 65% from $661 million in Q4 FY2008 to $232 million in Q4 FY 2009.[7]
Figures for the full year of 2009 also reflected drops across the board. Machinery and Engines Sales fell by 39% to $29.5 billion for 2009 as compared to $48.0 billion for 2008.[7] Financial Products Revenues fell by 13% to $2.9 billion in 2009 as compared to $3.3 billion the previous year.[7] Subsequently, profit for the year fell by 75% from $3.6 billion in FY2008 to $895 million in FY2009.[7] Drops in sales and revenues for 2009 reflect the highest single-year percentage drop since the 1940s.[7]
Trends and Forces
The success of Biofuels may enhance agricultural equipment sales
Caterpillar's agricultural equipment sector will prosper if the nation has to harvest massive amounts of corn or soybeans to fuel its vehicles. It takes about 21 pounds of corn to make 1 gallon of ethanol, which would mean much more demand for Caterpillar's tractors if corn based ethanol took off.
The demand for Ethanol and biofuels peaked in 2008 along with gas prices, only to falter in 2009. People only consume biofuels, it seems, when gas prices are extremely high. For instance, the Midwest has seen a 52% drop in ethanol consumption, with only a 3% drop in gasoline consumption. Ethanol is about 15-20% less efficient than gasoline, and studies have shown it needs to be about 40 cents cheaper per gallon to compete. [8] This implies that gas prices need to be relatively high for Caterpillar to benefit from the biofuel trend.
And the biofuel trend might miss the point. New research done at UC Merced and published in the journal Science in May 2009 presents evidence that crops yield 81% more energy per unit area of land when it is burned to make electricity to power cars than when it is refined into ethanol.[9] Furthermore, greenhouse gas emissions from this "bioelectricity" are 100% lower per unit area of land than cellulosic ethanol.[10] Certainly, Caterpillar would benefit from a switch to corn-based power, but not as much if that power does not require the excessive harvests that ethanol does.
It is also possible that Caterpillar tractors will not be used to harvest biofuels in the future. In July, 2009, Exxon Mobil (XOM) entered a five-year, $600 million partnership with Synthetic Genomics Incorporated, to develop algae-based biofuels.[11] Algae grows in the ocean, where Caterpillar equipment does not work very well.
U.S. Environmental Legislation and international green movements could decrease or increase demand for Caterpillar's equipment
The EPA has tougher standards, and just passed a Tier 4 non-road diesel requirement that will start affecting most of Caterpillar's nonroad machinery and engine products starting in 2011. Higher standards force Caterpillar to incur R&D expenses to make their products compliant. At the same time, Caterpillar is the largest company in the agricultural machinery space and can most easily afford these R&D expenses. The company could gain severe competitive advantage by developing and patenting a machine that meets environmental standards, if its competitors were unable to do so.[12]
Obama's Presidential Policy features explosive infrastructure spending which could increase demand for Caterpillar equipment
It is likely that the Obama administration will allocate about $136 billion to the states in order to fund road, bridge and water projects. Such an infrastructure overhaul has not been seen since the 1950s. [13]
Watch Caterpillar's website to see if it is getting contracts for state infrastructure projects. An exclusive contract could seriously bolster the company's bottom line. Infrastructure is about 5 times as equipment intensive as road and traditional construction work, which makes this possibility more enticing.
Increasing Demand in the Developing World Offers Market for Business
Rapid growth of Emerging Markets like Mexico, China and India all could benefit Caterpillar, which has distribution networks to provide worldwide industrialization projects with equipment. More than half of Caterpillar's revenue is international, and that number is increasing.
From an economic perspective, machinery has a higher marginal utility in places where it is underutilized. If a town has no tractors, 1 more tractor is far more significant than it would be for a town that already has 80 tractors. Thus, Caterpillar equipment will drive more value in developing markets. Look out for the stability of these markets, as their continued development bodes well for Caterpillar's business. Of course, political change, terrorism, and corruption are also risks worth following because they are associated with the governments of most developing countries.
The Recovery of the US Housing Market Will Determine Future Financial Performance
The US Subprime lending crisis led to a decline in home values which undermined Caterpillar's consumer facing equipment sales. Real Estate Developers simply do not need to buy new equipment to build new neighborhoods- they need to worry about their tanking investments. To monitor the performance of the US real estate market follow the IShares Dow Jones U.S. Real Estate Index Fund (IYR). It is down over 30% since July 2008 and is showing no immediate sign of recovery.
Competition
Caterpillar (CAT) plays in the large-cap, international Construction, Agriculture and Machinery Industry. Other companies include Deere & Company (DE), Kubota (KUB), Fastenal Company (FAST), Joy Global (JOYG), and CNH Global N.V. (CNH).
Caterpillar is the 800 pound guerilla in its space, with its annual net income exceeding that of its next 4 major competitors. But despite its huge size, Caterpillar has underperformed its peers for the last 5 years, still riding the momentum of decades of performance.
Its competitors have regional strength, because geography in the heavy machinery business matters (shipping cranes is never cheap). Komatsu, for instance, competes with Caterpillar strongly in Japan. Additionally, many international competitors have lower labor costs because Caterpillar (CAT)'s US employees demand higher wages for their work.
Caterpillar competes in several different markets, where it tends to dominate. The following charts show you how Caterpillar does relative to AGCO (AG), FIAT S.p.A. (F-MI), Kubota (KUB), Deere & Company (DE),CNH Global N.V. (CNH), and Terex (TEX) which are its primary public competitors.
Caterpillar Inc. traces its origins to the 1925 merger of the Holt Manufacturing Company, the inventor of the crawler tractor, and the C. L. Best Tractor Company, creating a new entity, the California based Caterpillar Tractor Company.[8] In 1986, the company re-organized itself as a Delaware corporation under the current name, Caterpillar Inc.[3] Caterpillar's headquarters are located in Peoria, Illinois, United States.[1]
Caterpillar machinery is recognizable by its trademark "Caterpillar Yellow" livery and the "CAT" logo.[9]
the leading manufacturer, by revenue, of engines and turbines used in machinery, electric generators, highway and non-highway trucks, and seaborne vessels.
During the eight years before 2009, CAT has seen unparalleled growth, largely on the back of a booming U.S. construction market, higher petroleum exploration and production, and growing demand for its equipment overseas. Caterpillar still managed to post record sales and profits during the 2007 subprime lending crisis, due to demand for infrastructure in emerging markets. Caterpillar posted record sales in 2007, which collapsed and moved in the red by 2009.[1] The global economic slowdown and commodity price collapse caused demand for mining machinery to dip below 2007 levels during the fourth quarter of 2008.[1] The company has increased in presence in several key regions such as China, which has seen unprecedented wealth growth and has a huge appetite for energy.
Though dependent on the declining US housing construction market, Caterpillar has diversified its sales internationally, aided by the global boom in infrastructure development.
Company Overview
Caterpillar is well-known throughout the world for its iconic large yellow machines.
With nearly 95,000 employees, Caterpillar's global footprint spans six continents and boasts the highest worldwide sales of its competitors. In addition to manufacturing and selling machines and engines, Caterpillar also provides financial products to its customers. Its three main businesses generated $7.5 billion in 2010, but have been hit hard by a collapse in commodity prices.[2]
Contents
1 Company Overview
1.1 Business Segments
2 Business Financials
2.1 Quarterly and Annual Financial Updates
2.1.1 Q4 FY2010 Quarterly and Annual Earnings
2.1.2 Q3 FY2010 Quarterly Earnings
2.1.3 Q2 FY2010 Quarterly Summary
2.1.4 FY2009 Annual Earnings Summary
3 Trends and Forces
3.1 The success of Biofuels may enhance agricultural equipment sales
3.2 U.S. Environmental Legislation and international green movements could decrease or increase demand for Caterpillar's equipment
3.3 Obama's Presidential Policy features explosive infrastructure spending which could increase demand for Caterpillar equipment
3.4 Increasing Demand in the Developing World Offers Market for Business
3.5 The Recovery of the US Housing Market Will Determine Future Financial Performance
4 Competition
5 References
Business Segments
The company has 3 primary segments: Machinery, Engines, and Financial Products. In 2008, Machinery and Engines accounted for 88% of the company's profit. Financial Products accounted for 12%.
Machinery: the design, manufacture, marketing and sales of construction, mining and forestry machinery—track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, skid steer loaders and related parts. Also includes logistics services for other companies and the design, manufacture, remanufacture, maintenance and services of rail-related products.
Engines: The design, manufacture, marketing and sales of engines for Caterpillar machinery; electric power generation systems; on-highway vehicles and locomotives; marine, petroleum, construction, industrial, agricultural and other applications; and related parts. Also includes remanufacturing of Caterpillar engines and a variety of Caterpillar machine and engine components and remanufacturing services for other companies.
Financial Products: Cat Financial provides a wide range of financing alternatives to customers and dealers for Caterpillar machinery and engines, Solar gas turbines as well as other equipment and marine vessels. Cat Financial also extends loans to customers and dealers. Cat Insurance provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment. Cat Power Ventures is an investor in independent power projects using Caterpillar power generation equipment and services. [3]
Business Financials
Quarterly and Annual Financial Updates
Q4 FY2010 Quarterly and Annual Earnings
Caterpillar announces revenues of $42.6 billion for the 2010 fiscal year, a 31% increase from $32.4 billion in 2009.[4] Profit similarly increased in 2010 to $2.7 billion, up from $895 million in 2009.[4] Fourth quarter revenues and profits were also up when compared to year-ago results. Revenue for the fourth quarter was $12.8 billion, an increase of 62% from fourth quarter earnings in 2009.[4] Fourth quarter profits were up by 317%, totaling $968 million, an increase from $232 million in the fourth quarter of 2009.[4] Increased demand, production, and efficiency drove these gains.[4]
Q3 FY2010 Quarterly Earnings
Caterpillar announced revenues of $640 million for the third quarter of 2010.[5] These revenues represent a 5% or $36 million decrease in revenues from the third quarter of the previous year.[5] Profit for the third quarter also decreased when compared to year-ago results. Q3 profit decreased by $3 million to $73 million for the quarter.[5] Losses were driven primarily by decreased earning assets and lower interest rates, both of which totaled $104 million in losses for Caterpillar in the third quarter.[5] Profit, however, increased as compared to year-ago results. Profit for the third quarter was $89 million as compared to $80 million the previous year.[5]
Q2 FY2010 Quarterly Summary
Caterpillar announced a profit of $707 million for the second quarter of 2010, a 91% increase from year ago results[6] This profit was driven by a 31% increase in sales and revenues which totaled $10.4 billion for the quarter, an increase of $2.4 billion from $7.9 billion in the second quarter of the previous year.[6] Sales volume primarily helped drive growth in the second quarter of 2010, increasing by $2.3 billion for the quarter.[6]
Machinery and Engine sales increased by 34% for the quarter culminating at $9.7 billion as compared to $7.3 billion in year ago results.[6] Financial products revenues, however, decreased by 5% to $686 million from $721 million the previous year, partially offsetting total quarterly sales and revenues.[6]
FY2009 Annual Earnings Summary
Caterpillar posted revenues of $32.4 billion for 2009, a 37% drop from $51.3 billion in 2008.[7] Profit per share similarly dropped by 75% for the fiscal year.[7] Fourth quarter results were also down compared to year-ago postings with sales and revenues dropping 39% to $7.9 billion and profit per share dropping 67% to $0.36.[7] Caterpillar experienced drops across the board in its machinery and engines sales and its financial products revenues.[7] Machinery and Engines Sales fell by 41% to $7.2 billion in FY2009 as compared to $12.1 billion in FY2008.[7] Financial Products Revenues fell from $803 million in FY2008 to $705 million in FY2009, a drop of 12%.[7] Profits for the quarter also fell by 65% from $661 million in Q4 FY2008 to $232 million in Q4 FY 2009.[7]
Figures for the full year of 2009 also reflected drops across the board. Machinery and Engines Sales fell by 39% to $29.5 billion for 2009 as compared to $48.0 billion for 2008.[7] Financial Products Revenues fell by 13% to $2.9 billion in 2009 as compared to $3.3 billion the previous year.[7] Subsequently, profit for the year fell by 75% from $3.6 billion in FY2008 to $895 million in FY2009.[7] Drops in sales and revenues for 2009 reflect the highest single-year percentage drop since the 1940s.[7]
Trends and Forces
The success of Biofuels may enhance agricultural equipment sales
Caterpillar's agricultural equipment sector will prosper if the nation has to harvest massive amounts of corn or soybeans to fuel its vehicles. It takes about 21 pounds of corn to make 1 gallon of ethanol, which would mean much more demand for Caterpillar's tractors if corn based ethanol took off.
The demand for Ethanol and biofuels peaked in 2008 along with gas prices, only to falter in 2009. People only consume biofuels, it seems, when gas prices are extremely high. For instance, the Midwest has seen a 52% drop in ethanol consumption, with only a 3% drop in gasoline consumption. Ethanol is about 15-20% less efficient than gasoline, and studies have shown it needs to be about 40 cents cheaper per gallon to compete. [8] This implies that gas prices need to be relatively high for Caterpillar to benefit from the biofuel trend.
And the biofuel trend might miss the point. New research done at UC Merced and published in the journal Science in May 2009 presents evidence that crops yield 81% more energy per unit area of land when it is burned to make electricity to power cars than when it is refined into ethanol.[9] Furthermore, greenhouse gas emissions from this "bioelectricity" are 100% lower per unit area of land than cellulosic ethanol.[10] Certainly, Caterpillar would benefit from a switch to corn-based power, but not as much if that power does not require the excessive harvests that ethanol does.
It is also possible that Caterpillar tractors will not be used to harvest biofuels in the future. In July, 2009, Exxon Mobil (XOM) entered a five-year, $600 million partnership with Synthetic Genomics Incorporated, to develop algae-based biofuels.[11] Algae grows in the ocean, where Caterpillar equipment does not work very well.
U.S. Environmental Legislation and international green movements could decrease or increase demand for Caterpillar's equipment
The EPA has tougher standards, and just passed a Tier 4 non-road diesel requirement that will start affecting most of Caterpillar's nonroad machinery and engine products starting in 2011. Higher standards force Caterpillar to incur R&D expenses to make their products compliant. At the same time, Caterpillar is the largest company in the agricultural machinery space and can most easily afford these R&D expenses. The company could gain severe competitive advantage by developing and patenting a machine that meets environmental standards, if its competitors were unable to do so.[12]
Obama's Presidential Policy features explosive infrastructure spending which could increase demand for Caterpillar equipment
It is likely that the Obama administration will allocate about $136 billion to the states in order to fund road, bridge and water projects. Such an infrastructure overhaul has not been seen since the 1950s. [13]
Watch Caterpillar's website to see if it is getting contracts for state infrastructure projects. An exclusive contract could seriously bolster the company's bottom line. Infrastructure is about 5 times as equipment intensive as road and traditional construction work, which makes this possibility more enticing.
Increasing Demand in the Developing World Offers Market for Business
Rapid growth of Emerging Markets like Mexico, China and India all could benefit Caterpillar, which has distribution networks to provide worldwide industrialization projects with equipment. More than half of Caterpillar's revenue is international, and that number is increasing.
From an economic perspective, machinery has a higher marginal utility in places where it is underutilized. If a town has no tractors, 1 more tractor is far more significant than it would be for a town that already has 80 tractors. Thus, Caterpillar equipment will drive more value in developing markets. Look out for the stability of these markets, as their continued development bodes well for Caterpillar's business. Of course, political change, terrorism, and corruption are also risks worth following because they are associated with the governments of most developing countries.
The Recovery of the US Housing Market Will Determine Future Financial Performance
The US Subprime lending crisis led to a decline in home values which undermined Caterpillar's consumer facing equipment sales. Real Estate Developers simply do not need to buy new equipment to build new neighborhoods- they need to worry about their tanking investments. To monitor the performance of the US real estate market follow the IShares Dow Jones U.S. Real Estate Index Fund (IYR). It is down over 30% since July 2008 and is showing no immediate sign of recovery.
Competition
Caterpillar (CAT) plays in the large-cap, international Construction, Agriculture and Machinery Industry. Other companies include Deere & Company (DE), Kubota (KUB), Fastenal Company (FAST), Joy Global (JOYG), and CNH Global N.V. (CNH).
Caterpillar is the 800 pound guerilla in its space, with its annual net income exceeding that of its next 4 major competitors. But despite its huge size, Caterpillar has underperformed its peers for the last 5 years, still riding the momentum of decades of performance.
Its competitors have regional strength, because geography in the heavy machinery business matters (shipping cranes is never cheap). Komatsu, for instance, competes with Caterpillar strongly in Japan. Additionally, many international competitors have lower labor costs because Caterpillar (CAT)'s US employees demand higher wages for their work.
Caterpillar competes in several different markets, where it tends to dominate. The following charts show you how Caterpillar does relative to AGCO (AG), FIAT S.p.A. (F-MI), Kubota (KUB), Deere & Company (DE),CNH Global N.V. (CNH), and Terex (TEX) which are its primary public competitors.
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