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Caterpillar's Future Under Trump Administration

Construction Resurgence Caterpillar Three days after the election of President Elect Donald Trump the DOW Jones Industrial average hit an all time high with a finish of 18,873 points November 10th. Across the board companies are surging in the wake of a pro business administration.

Those among the celebratory crowd is Caterpillar Inc. (NYSE:CAT) The heavy-machinery stock hit a 52 week high the day after the election and is up over 10% overall. The real question is whether or not expectations meet reality in the coming years.

Devalued Foreign Currency Struggle For U.S. Manufactures

Overall Caterpillar is up 33% this year with speculators correlating that this surge is due to Trump’s popularity in the primary elections and Trump’s support for the company mentioned in various Republican Debates. In January of 2016 Trump stated his disdain for foreign heavy equipment manufacturers such a Komatsu because American companies like Caterpillar have a hard time competing against a purposely devalued Yen currency.

Trump wants to put a stop to that type of manipulation which was caused by Japan’s central bank which he believes purposefully devalued the yen. This devalution in turn makes Komatsu’s machinery more affordable for U.S. companies to purchase than domestic Caterpillar equipment. Komatsu is the second largest heavy-equipment manufacturer in terms of revenue in the world only behind Caterpillar. Komatsu has also vowed to give Caterpillar a run for its money in terms of mining equipment with the purchase of Joy Global, CAT’s mining equipment rival. Donald Trump has promised to revive the coal industry in the United States which would be excellent news for all heavy-equipment manufactures as well as roll back EPA regulations that are costly for diesel engine manufactures like Caterpillar.

Caterpillar Equipment Up until this year Caterpillar has been in a slump with layoffs and plant closings around the United States and abroad. Caterpillar’s machinery sales have been down over 25% year over year and the company has reduced its construction equipment sales forecast for 2017, expecting weak sales to continue into the New Year. Komatsu on the other hand is only down about 2% over the year.

Increasing Tariffs on Foreign Equipment

The Trump victory has sent speculators into frenzy as many believe he will resort to imposing substantial tariffs on Japan and China to reduce the number of heavy machinery imports into the United States. This move should benefit the majority of equipment manufacturers but especially Caterpillar. In May, Trump sang the praises of the company stating how much he admired the inner workings of CAT Tractors and the people that work for the company. Trump is pro construction and pro growth and that is not to mention his promise of only using Caterpillar and John Deere equipment for the wall he is proposing to build between the U.S. and Mexico.

Speculation is just that… speculation. Imposing new tariffsand damaging already relaxed trade relations won’t be quick or easy. However, Caterpillar still stands to benefit from a Trump Presidency as infrastructure, energy and home development tend to take off after a lull. Reduced regulations can only be a positive for those in looking to do business in America. Donald Trump has expressed a desire to rebuild America’s old and crumbling infrastructure even proposing to spend over one trillion dollars on fixing highways, airports, dams and bridges over the next 10 years.

Hard Time For Caterpillar Inc. In Recent Years

Caterpillar Revenue Chart 2016Caterpillar may have been born in America however, it is a global company. Roughly 50% of its revenue comes from outside of North America. For really the past 30 years or so Caterpillar has rode the growth of developing markets and infrastructure outside the US. Growth has slowed in recent years for Caterpillar abroad. Most developing nations across the world have a basic to fair infrastructure that was upgraded/created from really nothing. A lot of modern roads, bridges, and drainage systems were put in place in the 1970-2000s and beyond for countries like India, Brazil, and China. Now that those networks are in place explosive growth has slowed.

Really the success of Caterpillar revolves around how quickly the international markets recover. A stronger yet more closed off America could also spell issues for Caterpillar which does import parts and machinery from its overseas facilities. It could be a double edged sword for the company. CEO Doug Oberhelman is expected to step down at the end of the year as his ambitious plan to sell more parts and service via aggressive policies backfired with Caterpillar dealers. Caterpillar is still overvalued from a stock perspective but this could shift if an explosion of growth takes place in the next few years domestically and abroad.

Trump’s goals are quite lofty and for some seem completely unreasonable but that if you look at Trump and his background this is exactly what he likes to do: build things. Trump has made a career of building up a small business empire of real estate such as casinos, hotels, golf courses, offices, condos and other resorts; even once owning Trump Airlines at one time. His ambitions are quite high and that can only bode well for Caterpillar here in America. Only time will tell how Trump’s policies will affect the heavy duty machinery industry and if his plans actually come to fruition, but ultimately Caterpillar is in better hands with the Trump Administration.

Sources -  Chamaria, Neha. "How a Donald Trump Presidency Could Affect Caterpillar Inc. Stock." The Motley Fool. N.p., 10 Nov. 2016. Web.