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Despite Setbacks, Caterpillar Is Built to Last

Daniel Ferry
September 23, 2013

Embattled heavy-equipment maker Caterpillar (NYSE: CAT) reported on Friday that global sales of its machines fell for the ninth consecutive month, tumbling 10% in the three months through August compared to 2012. The culprit is a worldwide slowdown in mining, an industry that Caterpillar made its top focus in 2010 after the collapse of the U.S. construction industry.

But Caterpillar is a business with a long strategic vision. The company is using the current period of weakness as an opportunity to consolidate its operations and reduce costs, biding its time for an upswing of the cyclical mining business, whether that be three, five, or 10 years away. I want to own Caterpillar when that happens — and I'm happy to hold it while I wait.

As the world's largest manufacturer of heavy equipment for construction and mining, Caterpillar has global exposure, and the slowing economy in China is behind much of the company's current struggle. During the last decade, the foundation of China's rapid economic growth has been heavy investment in infrastructure, most notably transportation, energy, and residential. That building boom has benefited equipment manufacturers such as Caterpillar in two ways: Not only does construction equipment get purchased, used, maintained, and replaced to build the infrastructure in the first place, but the need for the raw materials that go into infrastructure boosts commodity prices, leading miners to purchase more equipment.

More recently, however, observers from the Wall Street Journal and researchers at the International Monetary Fund (PDF) are expressing concern that China's massive investments are yielding lower and lower returns. A move away from an investment-led model to a consumption-led model will hit Caterpillar in the same two areas that initially benefited it: As infrastructure investment dwindles, there will be both less demand for construction equipment to build infrastructure and less demand for the mining equipment to produce commodities for infrastructure. That means Caterpillar's dealers and distributors in China have been running out their inventories, ordering less equipment, and, ultimately, dragging down Caterpillar's Asia-Pacific sales by 30%. That is the primary factor in the company's worldwide 10% sales slip

Still, there are certainly bright spots for the near term. On the hee