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Goldman Sachs Comments On Caterpillar Management Meetings


According to Goldman Sachs, Caterpillar (NYSE: CAT) management meetings reinforce sharp focus on cost control and acquisition integration.

Goldman Sachs reported that it came away from CAT management meetings increasingly confident in the company's much improved organization structure, the resultant focus on cost control, and its 10% above consensus estimates. “(1) We expect the recently implemented organization structure to drive increased focus on cost control as business managers now have greater discretion over corporate service expenses and face strict volume adjusted margin targets that effectively reward incremental margins. (2) If the BUCY acquisition closes, we see potential for CAT to build a meaningful presence in China by adding local capacity and leveraging parts of its supply chain. Key opportunities globally include higher aftermarket sales & optimizing overlapping distribution with CAT dealers. (3) CAT's four China dealers have committed to growing their footprint to coincide with CAT's excavator capacity ramp. (4) CAT sees Japan supply constraints easing & potential for additional power gen demand – we estimate a $2.5 bn market opportunity. (5) CAT's decision to review strategic alternatives for its external logistics business was driven by capex requirements to grow the business at lower returns than for CAT's core businesses. (6) Management sees potential for Machines margins to return to prior cycle highs of 14% in 1H2006 vs. GS estimates of 13.2%. (7) Mgmt sees lead times for high capacity mining trucks through 2H12. (8) CAT views recently stronger Engine retail sales as sustainable for Electric Power & Industrial, but Oil & Gas face tough comps in 2H12. (9) Management noted the CAT/NAV vocational truck had stronger orders at the ConExpo than any other CAT product. (10) CAT's aggregates customers see a challenging demand outlook and are operating below replacement capex.”

Caterpillar closed yesterday at $111.53.


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