While we have preferred to stay out of the heavy equipment industry with our proprietary portfolio, we have always had a strong level of respect forCaterpillar Inc. (CAT). Our respect has been reinforced by CAT’s ability to increase its revenues, EPS, free cash flows and profit margins over the last 10 years, with the exception of a major hiccup in 2009. Even with the weak global economy slamming Caterpillar’s revenue by 37% that year, the company still generated almost $900M in profits and maintained its dividends. For an economically cyclical, capital-intensive company, that is impressive.
One important takeaway for investors in analyzing and evaluating Caterpillar based on our analysis is that a company’s outlook more often than not is more important than what its trailing results were. We cannot take away Caterpillar’s success over the last decade and even over the last three years.
Despite the fact that the developed world has been muddling in the muck and morass of mediocre economic momentum, Caterpillar has shrugged it off like a champ and registered a 105% growth in revenues and a 530% increase in EPS since bottoming out in 2009.
The performance can be explained by the company’s high level of fixed operating costs in its business. If the company can generate healthy levels of revenue growth, it has a powerful effect on the bottom line and vice versa. Although the company reported impressive EPS growth in its Q3 2012 and YTD results, its outlook was a bit more subdued. Considering the high level of operating leverage and financial leverage that the company employs, we think that is an appropriate outlook for management.
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