Caterpillar Gets a Lift

News that the construction equipment maker is discussing a plan to buy most of Shin Caterpillar Mitsubishi Ltd. helps boost the shares

Caterpillar (CAT), known for its yellow bulldozers, could be called a trailblazer in Asia. The Peoria, Ill.-based construction equipment maker has been moving much of the business overseas and investors are finally noticing. Shares of the compnay rose 2.5% to $67.82 on Feb. 15 on news that Caterpillar executives are discussing a plan to buy most of Shin Caterpillar Mitsubishi Ltd. (SCM).

The company's global expansion started way back in 1963, when Caterpillar and Mitsubishi Heavy Industries Ltd. formed Caterpillar Mitsubishi Ltd., one of the first joint ventures in Japan to include partial U.S. ownership. They eventually renamed their shared construction and mining equipment making business Shin Caterpillar Mitsubishi. Now Caterpillar and Mitsubishi have signed an agreement to complete a new plan under discussion, in which Caterpillar would own most of Shin Caterpillar Mitsubishi's shares while Mitsubishi has the rest, according to a statement released from Tokyo on Feb. 14.

Caterpillar says it wants to integrate Shin Caterpillar Mitsubishi employees, dealers and suppliers into its global business. "Caterpillar's success in the Asia Pacific region is a critical part of the company's long-term strategy, both in terms of the importance of this region to our global manufacturing operations and because of the enormous growth opportunity represented by the vast number of customers in the region who are using our machines and engines," said Stu Levenick, Caterpillar group president with responsibility for Asia Pacific, in the press release.

This news hits after a slowing housing market in the U.S. sparked fears on Wall Street about Caterpillar. When the company said in October that its earnings per share for 2006 would amount to between $5.05 and $5.30, down from a previous forecast of $5.25 to $5.50, investors unloaded Caterpillar stock. The company's reduced forecast had even reignited worries that the overall U.S. economy may continue to show tepid growth for much of next year (see, 10/20/06, "Slower Housing Puts a Dent in Caterpillar").

But market commentator and "Mad Money" host Jim Cramer pointed out Feb. 14 that 48% of Caterpillar's sales and over half of its manufacturing plants are overseas now, according to a summary of the program published on the website Seeking Alpha. Caterpillar's business "is cyclical, but not totally levered to the U.S.," Cramer said. "It is the year people will recognize that Caterpillar is more than a housing play," wrote Seeking Alpha.

Caterpillar is indeed continuing to further grow its business overseas. To name a few examples, in 2006 the company's subsidiary Caterpillar Logistics Services, Inc. opened a new parts distribution center in the Lingang Industrial Area in Shanghai. In November, Caterpillar announced that it finished acquiring a former joint venture engine operation in Mathagondapalli, Hosur, India, which had been originally formed in 1988 as Hindustan PowerPlus Limited and has been renamed Caterpillar Power India Private Limited. The company is also planning to build a new manufacturing facility in the Suzhou Industrial Park in China's Jiangsu province in early 2007. And during the late 1990s, the company had expanded into Europe with acquisitions of engine makers like the U.K.-based Perkins Engines and of Germany's MaK Motoren.

Normally Caterpillar uses its cash mostly for things like these types of acquisitions and other expenses, but it also returns its remaining cash to stockhoders through its buyback programs. The company announced on Feb. 15 that it plans to buy back $7.5 billion of stock; timing will depend on market conditions and alternative uses of cash. Caterpillar expects to complete its current stock buyback program, valued at $6.4 billion and approved in Oct. 2003, within the next few months.

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