Caterpillar Shares — 3 Pros, 3 Cons

Despite its massive size, Caterpillar (NYSE:CAT) has been able to grow revenue at a nice rate.  From 2009 to 2010, the top line has gone from $32.4 billion to $42.6 billion.  And as for 2011, the expectation is that it will exceed $50 billion.

It should be no surprise then that investors love the stock.  Over the past year, the price is up a sizzling 72% to an all-time high.

But does this mean it’s time to take profits?  Or is there still room for upside?

Let’s take a look at the pros and cons:


Diverse platform. The principal business for Caterpillar is the machinery industry.  The target markets include construction, mining and forestry — such as with wheel loaders, log skidders, track and wheel excavators and backhoe loaders.

But Caterpillar has a large engine business as well as a thriving financing division.

Dealmaking. With strong cash flows, Caterpillar has been aggressive with acquisitions.  For example, the company purchased FCM Rail, an equipment leasing firm.  Caterpillar also bought the Inspection Products business from General Electric (NYSE:GE).

The company’s biggest deal, however, was the $8.6 billion purchase of Bucyrus International.  The company builds mining equipment for surface and subsurface industries.

Dealer system. This is a key competitive advantage for Caterpillar.  The company has a global organization of dealers, located across all U.S. states and 138 countries.  This is not only an effective way to sell equipment but also provide services to customers.


Cyclical business. Yes, when the economy is strong, Caterpillar has standout performance.  But when there is a falloff, the impact can be brutal.  This was certainly the case in 2008 as the world fell into a recession.  Caterpillar’s profit and revenue plunged.

While the global economy appears to be steady, there are still concerns.  The U.S. continues to have problems with its debt, and countries like Portugal, Spain and Greece are still having major issues. Even China is experiencing bouts of inflation.

Commodities. This is a big driver of Caterpillar’s business, and the decade-long boom in commodities has resulted in substantial growth for the company.

But how long can commodities continue their bull phase?  Is there now mostly speculation?

Management bandwidth. No doubt, Caterpillar has a stellar management team.  Executives generally have long tenures at the company and use effective management approaches, like Six Sigma.  But as the company grows — and engages in more acquisitions across the world — it will get tougher to deal with the complexities.  Consider that it has added roughly 21,000 employees since the first quarter of 2010.


Caterpillar does face competition, especially from Komatsu.  But because of the need for scale, the industry is more like an oligopoly.  As a result, there is little pricing pressure.

And the industry is enjoying strong long-term growth forces.  Of course, the main driver is the industrialization of the emerging economies like China and India.

Even with Caterpillar’s strong stock price move, the shares still look reasonable, with a price-earnings ratio of 27.  Besides, as revenues continue to soar, this will certainly mean better margins.

I light of all these factors, the pros outweigh the cons on the shares.

Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli.  He does not own a position in any of the stocks named here.

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