Caterpillar: Strengths, Weaknesses, Opportunities, Threats

Neha Chamaria, The Motley Fool
Updated

Caterpillar (NYS: CAT) doesn't really need an introduction. The manufacturing behemoth's bumper fourth-quarter numbers yet again proved how strong it is. But no company is perfect, and only a thorough analysis can give us a clear picture. Let's take a look into the Big Cat's strengths, weaknesses, opportunities, and threats to know where exactly it stands.

Strengths

  • Cat is one of the biggest global plays in the industry. Asia Pacific is the second largest market for the company, and it is expanding aggressively in rapidly growing places like China, India, and Brazil.

  • Cat is complementing its organic growth well with acquisitions. It acquired three big companies in the last 18 months -- Bucyrus, EMD, and MWM. Cat's ability to integrate and profit from them is unquestionable, as they are already adding to Cat's top line. The Bucyrus acquisition in particular has given the company a solid mining push.

Weaknesses

  • Cat's total debt-to-equity ratio stands high at 258%. It needs to continuously boost margins and ensure cash flow is strong enough to cover interest and debt-related payments as they come due. High debt levels can cause significant pain if markets slow down.

  • Europe accounts for nearly a quarter of Cat's total revenues. Impending crisis in the region remains a concern and can possibly create a big dent in Cat's top line if the situation gets worse.

Opportunities

  • Higher construction and mining activity in the emerging markets opens up huge opportunities for Cat. China in particular, where the company is investing big time, could change its fortunes.

  • After the Bucyrus acquisition, Cat has a broader mining product range than closest competitor and mining giant Joy Global (NYS: JOY) . So it's in a good position to grab a bigger share of the mining market.

  • Future trends such as natural-gas powered vehicles can provide Cat newer avenues to cash in on. It's already taken the first step by partnering with WestportInnovations.

Threats

  • Stiff competition from Joy Global, which is upgrading and setting up new capacities in China, remains a constant threat.

  • Global mining activity is closely related to commodity prices. Price volatility and uncertainty could hurt Cat's mining business.

  • High inflation and construction slowdown in China remains a challenge.

  • Depressed housing and construction activity in the U.S. and Europe -- two large markets for Cat -- could weigh on the company's margins.

The Foolish bottom line
Expanding globally can result in significant exposure to fluctuating economic conditions. However, Cat's experience and expertise should pack some punch. The scale seems to tilt more toward the pros than the cons, and Caterpillar remains a company that should continue rewarding its shareholders.

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At the time thisarticle was published Neha Chamaria does not own shares of any of the companies mentioned in this article.The Motley Fool owns shares of Joy Global. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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