Caterpillar is among the top industrial companies globally, and it is expected to grow in the coming years. The company shares have seen record highs recently. The construction and mining equipment company, the Caterpillar, appears to be set for a recovery in 2021 with many investors interested in buying the stock.
Return to Growth
The retail sales of Caterpillar’s equipment seem like they are ready to make a recovery and go up in 2021. With Caterpillar’s equipment, the main sales occur through independent retailers who oversee their own affairs. The speed with which dealers seem to have reduced their inventory indicates that they might order more Caterpillar equipment soon. The rolling three-month retail sales and these new developments suggest an upswing in sales and a return to growth in 2021.
Low Dealer Inventory
Caterpillar equipment is mainly sold through dealers, and as mentioned previously, the dealer inventory is running quite low. The dealers reduced more inventory than was expected in the fourth quarter. This gives cause for optimism that the dealers may end up ordering more Caterpillar equipment in the near future. The dealer inventory in 2020 was reduced by 2.9 billion dollars which positions Caterpillar in a good place for 2021.
Management Guidance
Even though the management team held back from giving yearlong guidance due to the pandemic, it still called for an improvement in equipment, energy, and FCF in 2021. This resulted in Caterpillar generating 3.1 billion dollars in FCF in 2020 which easily helped cover the 2.2 billion dollars of dividends. It is expected that Caterpillar would meet the FCF targets set out by investors in 2019. Management’s initial prediction was that the FCF cycle would be somewhere between 4 to 8 billion dollars, so an improvement to at least 4 billion dollars is expected in 2021.
Revenue Gained Through Services
Caterpillar has been attempting to decrease the cyclicality of its profit by expanding the sum of income it produces from its services. The service sales in 2020 declined 13% which is less than the decline faced by Caterpillar overall. The overall decline was 22 per cent. Subsequently, services rose as a rate of deals to 41% of equipment, energy, and transportation. It is anticipated that service deals will continue to grow in 2021 which should offer assistance that will help diminish the cyclicality of Caterpillar’s income over the long term.
End Markets Improvement
The administration has reached the conclusion that markets are making strides and more deals will develop in 2021. North American housing remains solid which should support deals of smaller machinery. Asia also seems to be resuming its construction activity and recovering from the pandemic.
Investors
For the investors, it is good news since the profit is exceptionally well preserved even at the end of the sales cycle. The administration also has plans to extend the payout. Caterpillar seems to be set for a strong 2021 which is good news for the investors and well deserved for Caterpillar after the dip it suffered in the last decade.