Name: Why Caterpillar’s Stock Is Soaring
Uploaded: 2021-05-14T06:54:33.000Z
Duration: 10 min
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Big yellow iron, the name Caterpillar calls to mind excavators, dozers, compactors, pavers and other heavy equipment

Relative clauses (Restrictive vs. nonrestrictive)

meant for digging, building and demolishing with a history that dates back more than 100 years.

Caterpillar went from a tiny tractor company with a single product to an international brand.

That stock's job sites worldwide with massive and distinctively mustard colored equipment.

But as of 2021, it was also a high flying stock.

It hit a record of 197 dollars and 54 cents on January 12th, 2021.

No doubt a welcome sign for a company that has seen its share of struggles over the last decade.

Some of its recent years had been pretty brutal from 2012 to 2016.

Much of the American economy was recovering from the recession, spurred by the financial crisis of 2008 and 2009.

But in those four years, Caterpillar was suffering one of the worst downturns of its roughly century long lifetime.

Shares began climbing again in 2016, and Caterpillar appeared to be back on track.

Then the covid-19 pandemic dealt another blow.

But much of the work the company has done during its tough times is poised to pay off, say investors.

Caterpillar took steps to improve its operations, shrinking its manufacturing footprint to about three quarters of its former size while

Company watchers say Caterpillar is also making better products.

Commodity prices have been rising again, a good sign for a company whose health is so closely tied to them.

And investors appear to be betting that one of the world's premier names in industrial equipment will benefit from a new presidential

administration, one that might push new infrastructure initiatives.

The founding of Caterpiller dates back to the late 19th century, when agricultural equipment was still primarily made up of horsedrawn vehicles,

Benjamin Holt developed a steam powered tractor in 1890 as engineers were increasingly turning to engine driven machinery to make work more

efficient. As steam powered machinery became more common, it posed problems for farmers.

The heavy equipment tended to sink into soft farming soil, especially in California's San Joaquin Valley, where many of Holtze customers were based.

Holte researched the problem and instructed engineers to swap out wheels for tracks on one of his steam tractors.

The tractor, known as number 77, passed its first field test on Thanksgiving Day in 1904.

The following year, Holt's son, Plaine, took a company photographer named Charley Clements out to a field.

And upon seeing the massive machine creeping toward them, Clemens said it looked like a monster caterpillar, the name stuck in spite of the fact that

Holt didn't care for it, and the first production Caterpillar plotted out of his factory in 1979.

Meanwhile, Holtze competitor s.L best bet on gasoline engines rather than steam, and was responsible for making many crucial mechanical

Today, DCL Best Tractor Company merged with Caterpillar Co.

in 1925, forming the Caterpillar tractor company.

Notably, early machines were typically painted gray.

The first variety of the signature yellow color was introduced in 1931 and called Highway Yellow.

It was swapped out for the caterpillar yellow that still coats the company's products.

Today, from just that one tractor, Caterpillar grew and became one of the world's biggest names in industrial equipment.

Today, Caterpillar has three main business units resources, energy and transportation and construction.

Construction is its largest business, and it could be said that this is what Caterpillar is widely known for the huge steam shovels, bulldozers,

cranes and other equipment crawling around construction sites.

But it also makes mining equipment, diesel and natural gas engines, industrial turbines and diesel electric locomotives.

In total, the company says, there are more than four million pieces of Caterpillar equipment and service somewhere in the world, though it is

considered a kind of blue chip name brand industrial firm Caterpillar has seen some struggles, especially in recent years.

In 2010, newly appointed CEO Doug Oberhelman began his tenure amid a boom in commodity prices.

Under his leadership, Caterpillar pumped up production, especially of mining equipment.

It also spent eight point eight billion dollars on Bucyrus International, a mining equipment company.

But starting around 2012, commodity and energy prices started to fall and Caterpillar was left with excess inventory and production capacity and

The company announced a restructuring plan in 2015.

They eliminated thousands of jobs and considerably shrunk some of its businesses.

So new CEO Jim Appleby came in and I think kind of kick started a lot of this real laser focus on cost

and, you know, restructuring and trying to improve cats' margins at each level of the cycle.

And that's been a big part of the story recently.

For example, the resources business pulled in 21 billion dollars in 2012 and just about eight billion dollars in 2020.

The company was getting back on its feet when covid hit.

In the last year alone, Caterpillar took out about two billion dollars worth of its fleet in order to improve inventories.

The company is expecting a turnaround in 2021.

I think what's underappreciated by the market is when you see a recovery in mind, commodity prices, things like copper, iron ore, which

we are seeing today, that benefits from that as they're one of the two big global suppliers of mining equipment.

And we're already seeing mining companies that are cats' customers raise CapEx and looking for about, you know, 20 to 25 percent CapEx

growth for 2020, one that feeds right into cats' revenues.

And then the second piece is oil and gas.

Cat is one of the biggest suppliers of equipment into the upstream oil and gas market.

And with crude prices moving higher, we're seeing early indications that upstream energy capex could also start to increase over the next

12 months or so. Rising commodity prices are set to fuel demand for mining equipment, especially important given that many of these firms have not

spent a lot on equipment in recent years and many have aging equipment fleets.

In addition, a weaker dollar will help the company sell more units abroad.

Recent indicators show that Caterpillar may be poised for a solid 12 to 18 months, say analysts, and a possibly bright future.

Beyond that, the Biden build back better platform includes highways, roads and streets and other applications that would need earth moving equipment.

Longer term, the company has other plans that could spur a lot of growth.

New technologies could add value for customers and distinguish Caterpillar from competitors.

These include vehicles and equipment that can be piloted remotely or even ones that can operate autonomously for those who may be a bit burned out on

news of supposedly imminent self-driving cars.

It is worth pointing out that fields such as mining and construction might be among those best suited to autonomous driving technology, since the

vehicles would operate on dedicated job sites where environments could be easily organized to allow safe use.

Another potential area of growth is services, Caterpillar said in 2019 that it plan to double service revenue to 28 billion dollars by 2026.

Analysts say this may include things like telematics, preventative maintenance messages sent to customers when, say, a part on a vehicle needs

to be replaced. The idea is to add some stickiness to Caterpillar's business deep in relationships with customers and keep them coming back

after they have already shelled out for the product.

By investing in both new technology and services, Caterpillar is making moves that can further distinguish it from competitors.

There are a few companies that can match CAT in terms of size, reach and brand recognition.

But there are some. John Deere is mostly known for farming equipment, but the company does have a construction business and the brand name has a

similar degree of recognition and customer loyalty to Caterpillar.

The Japanese manufacturer Komatsu also has a huge global presence in Earth moving equipment.

CAT is the global market share leader and construction equipment, and Komatsu is second.

Komatsu is also second to Caterpillar in mining.

There are also a lot of smaller construction equipment makers globally, especially in developing markets such as China.

Many of these players don't have the high end position Caterpillar has, which can actually benefit them in markets where customers are more price

conscious. Short term trends that stand in Caterpillar's favor, our recoveries and commodity prices and a construction recovery.

Some analysts expect to show around 2022 longer term.

Caterpillar aims to fend off rivals by staying at the cutting edge of technological development.

In the meantime, keeping the reputation its brand has earned.