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Subject:  Re: Caterpillar dn 4% on reduced earns projectio Date:  9/29/2012  7:45 AM
Author:  PaulEngr Number:  46601 of 46837

A couple things to point out:

1. QE-infinity. IE, let's print money until the debts are too small to matter. Last time they did this it had no effect on the "economy" except to cause massive real inflation on energy and food. Of course people in Washington don't actually buy either one so they conveniently claimed that inflation was less than 2%. The net result was that there was a surge in the mining industry in the U.S. Here we go again...

2. The shotgun wedding with Bucyrus. Count this one as a huge net loss. Everyone in the organization that can is bailing for the exits. At some point in the very near future (can't say where, when, or how yet), I expect there to be a new player in the dragline and shovel market. The inherent problem is that CAT considers themselves to be in the parts business. They have a number that is something like 6x to 8x the original price of the machine in parts streams for every machine they sell. And they insulate themselves from the repair business itself (CAT dealer network). The first thing that happened after the acquisition was that CAT tried to get their dealers to take on the centralized repair business that BE has. That was more or less a dead cat bounce with the dealers. Even the largest dealers in highly concentrated areas such as Texas, Florida, and Wyoming, wouldn't even consider touching it. There is a fundamental reason that there is only ONE boom repair crew in the world for instance. Second issue is that they have just about priced themselves out of the market on parts and there are multiple machine shops that have original BE drawings or even improved versions that were already producing parts for BE and are well known. CAT certified part means nothing in the large excavator business and since local CAT dealer doesn't exist either, and CAT does not want to have a national repair business (works against their business model)...well, you see the issue. So when you are valuing CAT, put in the BE acquisition as a big goose egg. If anything, count it as a loss.

3. Their famous "integration" moves in Peoria. They did do some changes but it was nothing like they promised would happen. As seen by the famous union issues over the last couple years.

4. Quality continues to fall victim to Harvard business school graduates. CAT's whole business model is having a repair shop just down the street. They want to sell parts and service at every opportunity. The quality goal is to be "good enough", and they are almost always a market follower in this regard, not a leader. However, the competitors have not just stood back and watched. Every mine has more and more machines manufactured by Komatsu, Volvo, or Deere. We've got Deere skidders and excavators. I have been literally cussed out by both production and maintenance for renting a CAT loader when a Volvo was down. Komatsu all but owns the large truck market (200+ ton). Anywhere that Volvo puts in a dealership they pretty quickly dominate large rubber tire loaders due to the fantastically better reliability. I have been watching the largest all 793F fleet out there and let me tell you, the reliability is just plain awful. The next batch will almost definitely be Komatsu if the decision was made today. CAT will still surge/shrink based on market forces but market share is not what it was and won't but unless they change their approach. This is simply an echo of what happened to the automotive market in the 1980's all over again except that due to volumes and scale, the change happens much more slowly.

My conclusion is that over the long term, I do not expect great performance out of CAT. This is sort of like investing in MSFT or MMM...the days of innovation and massive growth are over. However as a cyclical, they can certainly fill that niche for short term gains.
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