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CAT, Westport Work on New Know-How

Zacks Equity Research

Caterpillar Inc. (CAT) has partnered with Westport Innovations Inc. (WPRT), a global leader in natural gas engines, to co-develop natural gas technology for off-road equipment, including mining trucks and locomotives.

The two parties will combine technologies and know-how, including Westport High Pressure Direct Injection (:HPDI) technology and Caterpillar’s industry leading off-road engine and machine product technology.

The development program will be funded by Caterpillar and will start immediately for both new and existing engines, combustion technology and fuel systems. Commercial production is expected to begin in five years. Once the products hit the market, Westport will participate in the supply of key components.

In comparison to diesel, which is currently used in the majority of Caterpillar's engines, natural gas is a lower cost alternative. The engines running on natural gas will provide operational efficiencies  comparable to the diesel engines. Furthermore, reduced carbon emissions add to environmental benefits and will help meet regulatory emissions standards of the US Environmental Protection Agency (:EPA).

The liaison will initially focus on engines used in mining trucks and locomotives. The companies will gradually develop natural gas technology for Caterpillar’s off-road engines, which are used in a variety of electric power, industrial, machine, marine and petroleum applications worldwide.

This innovative stride will mark Caterpillar as the first manufacturer to bring HPDI technology to the high horsepower off-road market with an offering of the broadest product line of natural gas-fueled machines and equipment. The low cost and no compromise on the operational front lend a definite competitive advantage.  Furthermore, upgrading its older diesel-powered engines in several applications to natural gas-powered engines will be accretive to revenues. 

Caterpillar’s order backlog has steadily increased throughout the quarter and is at a new high, which holds promise for the year ahead. Many products have long lead times, with some slated for 2014. This bodes well for Caterpillar's future performance.

The company is persistently adding production capacity for many of its mining products. We believe that the top line at the company will continue to grow on the back of increasing demand for construction and mining equipment. Caterpillar plans to open new facilities and expand existing operations, particularly in the emerging markets, which will boost its long-term potential.

On the flip side, besides the European debt crisis, signs of a slowdown in China have triggered concerns. A slowing Chinese economy will have a negative effect on the infrastructure and construction spending with an immediate impact on Caterpillar’s sales in the near term.

We maintain our Neutral recommendation on Caterpillar due to the recent loss of momentum in sales growth, margin headwinds, negative impact of the European debt crisis and a slowing Chinese economy. The quantitative Zacks #3 Rank (short term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

Peoria, Illinois-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base.

Caterpillar operates two divisions: Machinery and Power Systems (M&PS) and Financial Products. Caterpillar competes with the likes of CNH Global NV (CNH), Komatsu Ltd.(KMTUY) and Volvo AB (VOLVY).

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