Caterpillar Is Building a Better Business

Industrial bellwether Caterpillar is one of the world’s leading providers of heavy construction machinery and a major player in industrial engines and transportation products. While clearly a cyclical company, management has worked intensely to reduce earnings volatility and structurally improve profitability and cash flow. Leadership established targets in 2017 to boost margins 300-600 basis points through cycle, generate $4 billion-$8 billion in annual free cash flow, and return substantially all industrial free cash to shareholders via repurchases and a progressive dividend. Management has executed very well and tackled costs via capacity rationalization and expense controls. Caterpillar established a goal to reach $28 billion in annual services sales by 2026 (2 times over 10 years). Having reached $23 billion last year, the company is well on its way to achieving this target, which improves margins and reduces cyclicality. The services strategy includes increasing digitization of machines to enhance predictive maintenance and increase the attach rate of customer value agreements.