CATERPILLAR

Industry: Farming and Construction Machinery
Dominant Players: Caterpillar (CAT), Deere & Co. (DE) and CNH
Differentiation: Through developing machinery with enhanced specification such as reduced emissions

• Future Growth Markets: Chinese construction industry and Russia’s focus on improving agricultural efficiencies
• World’s leading manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines
• Leading services provider through Caterpillar Financial Services, Caterpillar Remanufacturing Services, Caterpillar Logistics Services & Progress Rail Services
• Well diversified; Market Leader

Key Issues for Industry

• Costs: Mainly Raw materials for machinery equipment.  Steel prices remain high – strong Chinese demand and U.S. supplier power
• Farm Incomes: expected to decline after 3 yr growth due to higher energy and fertilizer prices. Lower investment in agricultural machinery.
• Demand: Drop in construction equipment demand due to housing demand slump.
• 2007: Softened demand for agriculture/construction equipment

Industry and CAT Growth

• Association. of Equipment Manufacturers (AEM)
• Estimates drop in Growth in sales volume expected in 2006 vs. 2007 compared to 2005 vs. 2006. 11.2% to 3.9% in U.S. and 10.9% to 6.4% worldwide.
• Caterpillar (CAT)
• Annual report indicates that’s its services revenue will increase from 33% of total revenues in 2006 to 40% in 2007 so this might mitigate some of the expected 2007 sales drop in equipment.
• Past:
• 8% compound annual sales growth over 16 years
• 1990 sales: $11 billion & 2006 sales: $41.5 billion:.
• Profit per share growth: 35% vs. S&P 500: 27% over past five years
• Caterpillar 2006 Profit per share: $5.17
• Future:
• 2007 Projections: $5.20 to $5.70 profit per share.
• From 2005 to 2010, 15-20% compound annual growth in profit per share
• Strategy: Focus on Quality and Process excellence with 6 Sigma and engaged employees
• Immediate focus (2007) on Cost Management. Expect record year in 2007 despite decline in two key North American industries, on-highway truck engines and U.S. housing.
• Strengths:
• Focus on Process Efficiencies, Costs and Quality (Six Sigma driven)
• Very Diversified in terms of offerings and customers
• Products & Services
• Services expected to account for 40% of total revenue
• U.S. and International customers
• Proven track record
• Strong management

Risks:

• Buy out: Companies with low P/E, good cash flow, not a lot of debt and no significant protective covenants for debt issues are good targets for LBO’s. If $50 billion LBOs can be considered possible, all but top 60 publicly traded companies are potential targets

Caterpillar in Asia:

• $5 billion in 2006 ($3 billion in equipment sales)
• #2 after Komatsu but leads Hitachi and Kobelco
• Joint venture with Mitsubishi Heavy Ind., & Shin Caterpillar Mitsubishi (SCM)
• 8% of global workforce
• Sales up 23% in Q2 compared to 2006
• Strong growth in infrastructure: roads, rail, power
• VP Asia Pacific “Business is very good” Don’t see any issue n the coming decade with respect to growth.
• Expanding in China: Introduced remanufacturing components in 2007

Bond Ratings:
Moodys: A2 Stable         Effective: 04/01/07
S&P 500: A Stable          Effective: 03/15/07
Fitch: N/R
Financial Numbers:
Current P/E: 15.44 
Estimated 1Yr P/E. 13.5
EV/EBITDA: 12.73
Sales Growth: 11.01%
D/E: 3.65
Operating Margin: 11.49%

Liquidity Ratios:
Cash Ratio: 0.025
Quick Ratio: 0.82
Current Ratio: 1.2
Total Debt/Total Cap: 80.00
Cash & Eq/Current: 2.4