Caterpillar Inc. is safe, steady and a strong investment choice

Caterpillar Inc. posted strong global economic growth in the second quarter, and continues to grow aggressively, making it a wise choice for investors. Source: Caterpillar Inc.

Caterpillar Inc. isn’t afraid to get down and dirty in a tough economic environment.

The world’s largest maker of earthmoving equipment specializing in construction and mining equipment, diesel and natural gas engines, as well as industrial gas turbines has learned to diversify over the years, operating more than 100 manufacturing centers and nearly 200 dealers worldwide. With strong growth in the last quarter, the company may be one of the best investment choices in a slow economy.

To the pleasure of investors, Caterpillar’s revenue growth in the second quarter became positive for the first time in 2008 compared to the year prior. Its profit of $707 million increased 91 percent from the second quarter last year. As well, its sales and revenues increased 31 percent to $10.4 billion.

Its past and future success may be due to two functioning plans: working efficiency and thinking globally.

Management estimates that lower raw material expenses and better cost controls helped save the company more than $300 million. As well, it posted the highest operating margin (9.7 percent) since the first quarter of 2009.  

“Given our positive sales outlook and Cat’s continued push toward more stable service-based revenue, we envision the firm’s midcycle operating margin rising to 10 percent,” said Adam Fleck, an analyst at Morningstar Inc., in a note.

Much of the what is propelling the 85-year-old company forward is an improvement in the global outlook.

The Peoria, Ill. company is among those that have benefited from growth in emerging economies. Its sales to Latin America rose 116 percent to $621 million in the second quarter from a year earlier. The company also saw 62 percent growth in the Asia/Pacific region to $662 million and even a 36 percent growth to $364 million in the European economies.

“With this rebounding revenue and continued cost-control initiatives, Caterpillar enjoyed one of its highest quarterly operations in the recent past,” Fleck said.

Machinery and engine debt to capital metrics improved to 41.9 percent compared to 45.2 percent at the end of the first quarter, and from 53.1 percent from the same quarter last year, showing an improvement in its accounting books.

In a bid to grow aggressively and kick-start growth in the European and U.S. markets, Caterpillar announced plans last week to open an excavator assembly plant in Victoria, Texas. This plant will employ more than 500 people, triple the company’s capacity to produce excavators in the U.S., and expand production in anticipation of  global demand for construction machinery in the future.

The company also recently announced plans to quadruple excavator capacity at its manufacturing plant in Xuzhou, China to support the growing demand in that country.

“The developed countries of the world, like the United States, in Europe and Japan, are also growing but more slowly,” said Mike DeWalt, director of investor relations, in a conference call. “And while economic growth in developed countries has helped, we still have a very long way to go.”

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