They say a cat has nine lives, but Caterpillar (CAT -6.15%) just needed nine days to get back on its feet. The industrial bellwether surged 15% between its open on Aug. 28 and its close on Sept. 10th before taking on an additional 3% gain between Sept. 10th and Monday's close. The surge is due in part to easing trade tensions between the U.S. and China. Does this recent rise mean the fun is over, or could Caterpillar still be a buy?
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Segment breakdown
Caterpillar operates through four primary segments: construction, energy and transportation, resources, and finance.
|
Segment |
Revenue FY 2018 |
Percentage of Total Revenue |
|---|---|---|
|
Construction |
$23.1 billion |
42% |
|
Energy and transportation |
$18.8 billion |
35% |
|
Resources |
$9.9 billion |
18% |
|
Financial Products |
$2.9 billion |
5% |
Data source: Forbes.
Construction
The largest and best known of Caterpillar's industries is construction. The company's global expansion of its construction business into Asia was once praised as an opportunity for growth but is now seen as a weakness. Ongoing tensions between the U.S. and China as well as competition from Japan and China have pressured Cat's earnings for several quarters. "We expect continued pressure from competitive pricing in China," said D. James Umpleby, chairman and CEO, during the company's latest earnings report on July 24.
It's not just in Asia that Caterpillar's construction business is hurting. African, Middle Eastern, and North American residential construction remain weak. Caterpillar's Latin America construction business used to be weak but is now recovering, albeit slowly. The good news is that investment in North American infrastructure, Caterpillar's bread and butter, continues to be strong.
Energy and transportation
The second-largest segment for Caterpillar is the energy and transportation space. Strong performance of rail locomotives and services, continued growth in power generation, a strong gas compression segment, and solid performance by Cat-owned Solar Turbines make Cat's energy and transportation segment the shining light of Caterpillar's business model. Caterpillar's reciprocating engine business is dominant in the Permian Basin in West Texas. Unfortunately, the oil and gas business has slowed because there aren't enough pipelines to transport hydrocarbons to the refineries and shipping terminals along the Gulf Coast. Caterpillar expects its engine business to improve during the fourth quarter when highly anticipated pipelines are expected to come online.
Resources
Caterpillar's resource segment is also doing incredibly well. "We expect demand for heavy construction as well as quarry and aggregate equipment to remain strong in resource industries this year. Most commodity prices remain at investable levels," said Umpleby.
Financial Products
Cat Financial and Caterpillar's insurance services help customers finance and protect their assets by offering natural disaster assistance, equipment protection plans, and tools and calculators for budgeting small to large scale projects in all three of Cat's business segments. The financial products segment now represents 5% of the company's total revenue.
Steady and strong
Caterpillar's global business model and diversified portfolio shines when the global economy is doing well. However, economic weakness from trade tensions and weak Latin America and African markets hurt multiple sectors of Cat's business. Despite all of these headwinds, Caterpillar was still able to increase its sales and revenues to $14.4 billion, up from $14.0 billion in Q2 2018. Its profit per share was increased slightly from $2.82 to $2.83 between Q2 2018 and Q2 2019.
Although growth is slow, $1.4 billion in share repurchases, $500 million in dividends paid, and $7.4 billion in enterprise cash on hand give Cat a healthy financial position for quarters to come. Even after rising 15%, the stock still yields a 3.16% dividend and has a remarkably low P/E of 12.26.
Caterpillar's recent 15% rise shouldn't dissuade investors who believe in the long-term growth of the global economy. If anything, the surge proves that Wall Street knows Cat's business is strong and trades the stock higher on even the slightest positive trade news.
