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Morningstar | Initial Signs for 2019 Positive Despite Caterpillar Guidance Below Street Expectations

Over the past century, Caterpillar has skillfully constructed a product portfolio that has made it the largest construction and mining equipment manufacturer in the world. Through this process, it has developed the world’s most valuable heavy equipment brand. While many of the segments Caterpillar operates in are highly competitive, we believe its strategy of investing in optimal product design coupled with strong brand development places it far ahead of the competition and will continue to do so. Moreover, we view Caterpillar as the best-run company in the heavy equipment market and especially like its focus on total cost of ownership.Caterpillar has created a virtuous cycle by manufacturing superior quality equipment that has fostered a premium product reputation. The equipment therefore is highly fungible with known resale values. It also has a robust support infrastructure, which creates a lucrative aftermarket business.From compact track loaders to mining trucks with 400-ton capacities, Caterpillar competes in myriad segments of the heavy equipment industry. Complementing this broad range, Caterpillar offers a host of technology solutions through Cat Connect and Minestar, including fleet management systems, equipment management analytics, and autonomous machine capabilities. While much of Caterpillar’s growth has been organic, it has made significant acquisitions during the past 15 years. The largest of these was the purchase of Bucyrus International, which makers large mining equipment, in 2011 for $8.6 billion. While the timing of the Bucyrus acquisition may have been questionable, it ultimately made Caterpillar a stronger competitor against Komatsu. Caterpillar entered the rail industry after it acquired Progress Rail Services and Electro-Motive Diesel, in 2006 and 2010, respectively. We question the synergies of rail with Caterpillar’s core business.Caterpillar has an installed base of over 2 million pieces of equipment, with over 700,000 of these connected via telematics. Caterpillar benefits from this base as it generates high-margin recurring revenue from the sales of parts. Approximately 54% of its revenue is from outside North America.