Morningstar | CAT Updated Forecasts and Estimates from 06 May 2019
During its 2019 investor meeting, Best Idea Caterpillar outlined ambitious plans to increase aftermarket revenue in the form of digital offerings and greater part sales. Management now targets a doubling of parts and service revenue to $28 billion by 2026 from $14 billion in 2016. This should enable the company to reduce cyclicality and increase operating margins that should stay within 10% to 21% throughout the cycle. The targeted operating margin is now 3% to 6% above historical levels, greater than the 2% to 5% improvement suggested in 2017. Management also disclosed that corporate parts and service sales stays within 30% to 40% of revenue, which is higher than the 20% of other heavy equipment companies that disclose such information.In outlining its services strategy, management indicated that it anticipates connected assets will increase by 25% in 2019 to 1 million. This connectivity fosters several new revenue streams, including software subscriptions, predictive maintenance, and greater parts sales throughout the life of the equipment. Caterpillar also announced significant enhancements to its mobile app beyond merely providing machine status, allowing for remote access control and geofencing.
We were also impressed by the enhancements Caterpillar has made to dealer software that employ machine learning to optimize inventory and facilitate predictive maintenance. Additionally, it has deployed advanced diagnostic and software repair tools that allow technicians to work on machines remotely.
We like Caterpillar’s larger technology strategy as it addresses the needs of its customers, large and small. It now has 600 employees working in its digital enabled solutions department, including 90 in its downtown Chicago digital and analytics hub. By taking the road of providing technology-rich equipment with more points of contact, it serves to both optimize its customers' operations while capturing greater lifetime customer value.
Caterpillar is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company segments include: Construction Industries, which supports customers using machinery in infrastructure, forestry and building construction; Resource Industries, which supports customers using machinery in mining, heavy construction, quarry and aggregates, waste and material handling applications; Energy and Transportation, which supports customers in oil and gas, power generation, marine, rail and industrial applications, including Cat? machines; and Financial Products, which provides financing and related services.
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