Heavy-equipment maker Caterpillar (CAT 4.09%) has in many ways been the focal point of discussion about the global financial slowdown, as the company has found itself exposed in a number of key sectors affected most by the sluggishness in the global economy. Between construction, infrastructure, energy, and materials, Caterpillar has seen customers in its key target industries become increasingly reluctant to spend money on capital expenditures, and that in turn has led to big declines in sales. Yet Caterpillar still has hope for its future. Late last week, investor relations representatives Richard Moore and Matt Hohulin addressed attendees at the 3rd Annual Laguna Conference, and they had a lot to say about where Caterpillar stands and where it's headed. Let's look at some of the most important things they said about Caterpillar.
1. "[O]ur strategy as we operate around the globe is to really compete with local competition head-to-head in their home turf. When we can do that successfully, like we have in China to some degree, that does limit the ability for local manufacturers to expand outside of their home country."
The strong dollar has definitely held Caterpillar back, because of both the devaluation of its overseas sales and the competitive advantage it gives foreign manufacturers. Yet Caterpillar notes that it has extensive international production facilities that can also enjoy cost savings in dollar terms when foreign currencies are weak, and it believes that by matching up with its foreign rivals, it can reap some of the benefits of a strong dollar and lessen the negative impact of currency fluctuations.
2. "If you think about where Caterpillar participates in the construction industry, it's probably a little bit heavier-weighted on the infrastructure, land clearing, road building, site development areas of the industry. And that's the weak part related to oil and gas right now."
Caterpillar foresaw at the beginning of 2015 that the falling energy market would have a direct impact on sales to the industry, but it also anticipated collateral damage in other arenas as well. The company has seen that scenario play out, with the needs falling for various energy-related projects like building roads and providing infrastructure services to hard-to-reach shale drilling areas. Caterpillar thinks that it can see a recovery even without oil prices returning to former high levels, but it will take a little more time for the industry to stabilize.
3. "Off a low base, [Western Europe] is positive. I wouldn't call it materially positive, but it's better than it was."
Europe has been a thorn in Caterpillar's side for a while, with the weak euro and recessionary conditions combining to create a hostile environment for the equipment maker. Now, though, Caterpillar sees some improvement in Europe, and it's hopeful that moves from the European Central Bank could help create additional sales on the continent.
4. "Regions around the world [are] so far depressed from where they were over the past few years -- primarily China, Brazil, other developing countries. ... Those industries have come down so far that it wouldn't take much improvement in their economies for those maybe to inflect up a little bit."
Caterpillar benefited greatly from emerging markets, so their decline hurt the company a lot. The equipment maker doesn't see a near-term positive move in the cards for key emerging-market economies, but it remains hopeful over time that a potential recovery could have a huge impact on Caterpillar's international success.
5. "You have to be careful when you make comparisons between us and Joy [Global] as well."
Many industry analysts treat Joy Global (JOY +0.00%) as being essentially in the same boat as Caterpillar. Yet as Hohulin noted, Joy Global has more coal exposure than Caterpillar, and given the huge hit that coal has seen, Caterpillar would argue that Joy Global is more vulnerable because of that difference. At the same time, Caterpillar also has a dealer-driven model as opposed to Joy Global's direct sales efforts, and so the pullback in industry spending has a more immediate impact on Joy Global than on Caterpillar.
6. "We made a conscious decision to increase spending in research and development."
At a time when margins are already under pressure, Caterpillar is trying to be smart about containing costs. Yet the equipment maker is boosting R&D spending even though its profits are low, with the company saying that investing in technology, automation, new product introductions, and other innovations is essential in sustaining and building market share and long-term competitive advantage. Overall, Caterpillar thinks R&D spending will be up 10% this year, and investors can hope that the money will pay off in better sales down the road.
Caterpillar will likely continue to struggle well into the future, given the size of the challenge that the global economy faces in restoring and sustaining its growth. Still, Caterpillar is taking smart steps to try to get through the downturn and position itself for eventual growth down the road.
