Caterpillar Inc. (CAT) announced that it will build a new facility in Wujiang, China to produce mini hydraulic excavator models in the under 8-ton range to meet the burgeoning demand of customers in China — the world’s largest market for excavators in the below 8-ton class.
The facility will be part of Caterpillar’s Building Construction Products (BCP) Division, which has manufacturing operations in the United States, Japan, Brazil and the United Kingdom. Construction will start in late 2010 pursuant to approvals from the government in the Jiangsu province and production is expected to begin in 2012.
Currently, Caterpillar caters to the Chinese customers with mini excavators produced at its Xuzhou facility in China and from Sagami, Japan. Once the facility in Wujiang is in operation, this will free production space at the Xuzhou and Sagami facilities, which the company can utilize for manufacturing other products.
In June, Caterpillar had announced its intention to expand its excavator facility in Xuzhou, China. The company expects its China-based excavator capacity to almost quadruple once expansion plans are completed in 2014. In September, Caterpillar announced the acquisition of an industrial facility located in Campo Largo, Brazil, with further plans of expansion, to enhance the production of backhoe loaders.
Caterpillar has rightly focused on developing markets like China and Brazil where infrastructure development has spurred the demand for wheel-loaders, bulldozers, excavators and other heavy machinery. We thus appreciate Caterpillar’s prudent expansion plans in these markets.
We believe Caterpillar’s investment in expansion and acquisitions would pay off with burgeoning, long-term earnings potential. Robust growth in the Asia-Pacific region and Latin America, and continued improvement in the mining and energy markets will strengthen Caterpillar’s volumes and sales.
Further, Caterpillar is well positioned to expand margins through its CAT Production System initiatives, market leadership and ultimate pricing power. However, its severely underfunded pension plans could necessitate increased mandatory funding in 2010 affecting its capital expenditures plans. We have a Zacks #2 Rank (short-term Buy recommendation) on the stock. We also reiterate our long-term Neutral rating.
Peoria, Illinois-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. Caterpillar is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base. The company operates three divisions –– Machines, Engines and Financial Products.
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