Caterpillar Stock Only Good For A Couple Bucks More

Amid concerns relating to the European debt crisis and lackluster growth of the U.S. economy, Caterpillar is holding its ground pretty well. It recently entered into a new contract with Dealer Ring Power and APR Energy, and it has expanded its existing contract with Navistar.

Both of these ventures are aimed at expanding Caterpillar’s presence internationally and boosting its machinery sales. The company’s acquisitions of Bucyrus and EMD last year are expected to drive sales of its mining machinery and rail machinery higher in the long run.

With a strong cash position and market share of close to 30% in global machinery market, Caterpillar is in a good position to compete with peers like Deere and Co., Komatsu, Terex and Cummins.

Caterpillar Expands Presence with New Partnerships

Last month Caterpillar and dealer Ring Power signed an agreement with APR Energy whereby CAT will be supplying mobile generator sets to meet the temporary power needs of international power projects. [1]

While APR benefits from an integrated supply chain, Caterpillar can expand its presence in the international power projects market.

In another partnership, Caterpillar is entering into the second phase of its partnership with Navistar. This is a 50-50 joint venture with focus on developing on-highways trucks for North America as well as international markets like Australia, South Africa and Brazil. [2] These two partnerships indicate Caterpillar’s desire to expand internationally and boost its machinery sales.

Macro Concerns Loom, But Caterpillar’s Outlook Looks Strong

Despite the construction and machinery industry treading cautiously in fear of another slump in customer demand due to weak economic growth, Caterpillar is financially sound with free cash flow equaling 6.5% of revenue. Starting January 2012, the company is planning to raise machinery prices by up to 3% suggesting more revenues in first half of 2012. (See Caterpillar Digs Foreign Markets, Shakes Off Slowdown Concerns)

In an effort to meet future demand for machinery globally, Caterpillar recently announced the opening of its expanded facility in Sanford, North Carolina. Mary Bell, VP of Caterpillar Building Construction Products Division, stated, “This strategic investment is part of Caterpillar’s long-term strategy to deliver the highest quality, best value building construction machines in the industry.”

While we estimate Caterpillar’s share of global machinery market will increase from close to 32% in 2012 to 34% by the end of forecast period, Trefis members expect an increase from 33.7% to 39% during the same period. The member estimates imply an upside of roughly 10% to the Trefis price estimate for Caterpillar’s stock.

We currently have a Trefis price estimate of $86 for Caterpillar’s stock, which is slightly ahead of the current market price.

Source: Forbes.com