Free Annual Reports
Caterpillar's Bullish Bet On Mining
Global mining giant Caterpillar (NYSE:CAT) recently announced that it is acquiring Bucyrus International (Nasdaq:BUCY), a U.S.-based manufacturer of mining machinery. Caterpillar is paying $8.6 billion, which includes the assumption of approximately $1 billion in debt. The deal will be financed via a combination of cash, newly issued Caterpillar shares and debt. With interest rates at historical lows, most of the purchase price will be financed via debt.
IN PICTURES: World's Greatest Investors
Mining for Profits
Caterpillar, already the world's largest maker of mining equipment by revenue, is significantly increasing its mining equipment capability. Fueled by the strength in commodity and metals prices, Caterpillar's move is a sign of a long-term favorable outlook for the industry. The basic building block of economic growth is urbanization. As migration patterns continue to favor city life, nations like China needs vasts amounts of steel in order to develop cities. Demand for steel fuels demand for coal and iron ore, which of course have to be mined out of the ground. Caterpillar's $92 per share offer for Bucyrus represents a 32% premium over the closing price prior to deal announcement. Considering the positive move in CAT shares as well, the market seems to favor this deal. Since $5 billion of the purchase price is expected to be debt financed, share dilution should be kept to a minimum.
Who's Next
Unsurprisingly, the deal has lifted the entire mining sector. The deal values Bucyrus at over 27-times earnings and over 13 times trailing EBITDA of $580 million. It's not surprising then to see shares in rival Joy Global (Nasdaq:JOYG) were up over 8% following the news. Even still, JOYG trades for 19-times earnings and just over 10-times EBITDA. Overall, shares in mining stocks have been strong this year, fueled by rising commodity prices. Still, names like smaller mining rival Terex (NYSE:TEX) and CNH Global (NYSE:CNH) may be worth further investigation now that Caterpillar has publicly shown its bullish view on the mining sector. Yet, both companies' shares were up over 5% on the news of Caterpillar's acquisition of Bucyrus.
The Bottom Line
Commodities have been in a surge in recent months, and Caterpillar's deal for Bucyrus signals that management at Caterpillar feels optimistic about the future going forward. It will be interesting to see how the market and the competition respond in the weeks ahead. (To learn more, see our Mergers & Acquisitions Tutorial.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: World's Greatest Investors
Mining for Profits
Caterpillar, already the world's largest maker of mining equipment by revenue, is significantly increasing its mining equipment capability. Fueled by the strength in commodity and metals prices, Caterpillar's move is a sign of a long-term favorable outlook for the industry. The basic building block of economic growth is urbanization. As migration patterns continue to favor city life, nations like China needs vasts amounts of steel in order to develop cities. Demand for steel fuels demand for coal and iron ore, which of course have to be mined out of the ground. Caterpillar's $92 per share offer for Bucyrus represents a 32% premium over the closing price prior to deal announcement. Considering the positive move in CAT shares as well, the market seems to favor this deal. Since $5 billion of the purchase price is expected to be debt financed, share dilution should be kept to a minimum.
Unsurprisingly, the deal has lifted the entire mining sector. The deal values Bucyrus at over 27-times earnings and over 13 times trailing EBITDA of $580 million. It's not surprising then to see shares in rival Joy Global (Nasdaq:JOYG) were up over 8% following the news. Even still, JOYG trades for 19-times earnings and just over 10-times EBITDA. Overall, shares in mining stocks have been strong this year, fueled by rising commodity prices. Still, names like smaller mining rival Terex (NYSE:TEX) and CNH Global (NYSE:CNH) may be worth further investigation now that Caterpillar has publicly shown its bullish view on the mining sector. Yet, both companies' shares were up over 5% on the news of Caterpillar's acquisition of Bucyrus.
The Bottom Line
Commodities have been in a surge in recent months, and Caterpillar's deal for Bucyrus signals that management at Caterpillar feels optimistic about the future going forward. It will be interesting to see how the market and the competition respond in the weeks ahead. (To learn more, see our Mergers & Acquisitions Tutorial.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
Free Annual Reports
