Belfast Telegraph

Caterpillar stays on track despite some tough terrain

By John Lynch

I'm not sure there is still the fascination there once was about the efficacy of "brands". But if I need convincing, one big international company could do it for me.

It is the heavy engineering plant and equipment maker Caterpillar (CAT) - owner of the generator maker formerly known as FG Wilson, one of Northern Ireland's best-known manufacturers.

Not alone does it have its own very distinctive presence on the construction site, it also has its own special colour.

In addition, if you happen to be bored with your Caterpillar hydraulic excavator or wheel loader, the company has licensed its brand worldwide so you can buy Caterpillar hats and clothing for the garden and runners for the beach.

Caterpillar (NI) Ltd is Europe's biggest manufacturer of diesel and gas generator sets and recently expanded production to include material handlers and articulated truck axles.

CAT is one of those special firms that grew out of an inspired piece of engineering, the patenting of a tractor using, not wheels, but a continuous track.

Construction in the mud has never been the same. As far as heavy engineering is concerned, CAT is ubiquitous.

It designs, manufactures and markets construction, mining, power, marine, and forestry equipment and provides financing and insurance to its worldwide network. Valued at $60bn (€48bn), it has 110 facilities worldwide, 51 in the US; employs 130,000, half in the USA; and owns 14,000 patents. It also has over 400 products, which it distributes through 170 independently owned CAT dealers with exclusive territories.

With sales of $56bn worldwide, CAT's divisions include construction, power systems, resource and finance.

The North American market is its largest with sales of $21bn; Europe and Asia/Pacific turnover is worth $13bn while Latin America sales come in at $8bn.

In construction equipment the majority of company sales are heavy and general construction equipment with an extensive portfolio of products.

Interestingly, demand over the past decade has shifted to developing countries.

In response CAT has developed products specifically for these markets, which are not without competition from heavyweights like Kamatsu, Hitachi, JCB and the Chinese Liu Gong Machinery.

CAT's resource business supplies equipment for quarries, mines, forestry and tunnelling. It provides off-road trucks, hydraulic shovels and tunnel boring equipment, with sales last year of $13bn and profits of $1.5bn, down from $4bn.

However, mining growth has slowed and in response CAT decided to reduce the pace of its investments.

The company's power systems (now Retail Energy and Transportation) business is the group's largest with sales of $20bn and profits of $3.4bn. CAT products include turbines, reciprocating engines and systems for power generating and diesel electric motors.

Like other CAT divisions, demand for its powers systems have increased significantly in developing markets.

For over 30 years, the firm's financial services (including insurance) has been providing finance to its dealers and customers. Revenues last year were $3bn and profits $1bn.

Over the last number of years CAT sales (and income) have been volatile, ranging from $32bn five years ago to $62bn in 2012. Last year was 'challenging' and revenues contracted to $56bn, with earnings declining by a third.

Full-year gains from its cost reduction programme were offset by the fall in sales. Despite these problems, the company pressed ahead with a $10bn share buy-back scheme.

The CAT share price is surprisingly stable, hovering between the ranges of $89/93 in the last four years. The firm's strong cash flow enabled it to increase its dividend for an impressive 20th consecutive year.

The company expects construction sales to increase, driven by the recovery in the United States.

The outlook for the company's other businesses are hard to call, particularly in emerging markets. So its share at $100 is fairly valued.

Belfast Telegraph