Caterpillar Well-Positioned Amid Infrastructure Boom

Scott Pope: As emerging economies become more urbanized and developed economies replace aging infrastructure, the demand for construction equipment continues to increase. We currently feel wide-moat Caterpillar is optimally positioned to benefit from this infrastructure boom and is significantly undervalued. In recent quarters, Caterpillar has done a remarkable job increasing its profitability. By reducing 25% of its overall manufacturing floor space and trimming headcount by approximately 14%, Caterpillar has emerged a leaner, stronger organization.

Our recent research suggests Caterpillar offers significant upside potential. While the North American construction segment is experiencing significant tailwinds, many of Caterpillar's business segments are well below their midcycle peaks. Currently, its resource industries segment is generating less than half of the revenue it was in 2012. Caterpillar's rail division has also been particularly depressed in recent years suggesting future revenue improvements are likely.

We are especially impressed with Caterpillar's overall strategy, which is aligned with its customers' needs. As cheaper brands have entered the market, Caterpillar has maintained its focus on providing the lowest total cost of ownership equipment. This entails manufacturing the highest quality products with performance enhancing features and, in the process, extending its technical leadership. For customers in emerging markets who remain focused on upfront cost, Caterpillar manufactures a range of equipment in China under its SEM brand.

Going forward, Caterpillar is poised to capitalize on a variety of global opportunities. The company boasts an exceptionally strong brand and robust dealer network. Considering its wide moat, recent operating performance improvements, and upside revenue potential, we feel Caterpillar presents an excellent opportunity investment at this juncture.