Chart by author. Information source: Caterpillar SEC filings.
Chart by author. Information source: Caterpillar's SEC filings.
Caterpillar isn't the only heavy machinery manufacturer to feel the pain; Joy Global finds itself in a similarly gloomy scenario.
However, investors looking to invest in heavy machinery in anticipation of a global recovery in the medium term should take a closer look at Ritchie Bros. Auctioneers .
Ritchie Bros. Auctioneers is the world's largest seller of used heavy equipment and generates almost all of its revenue from unreserved auctions. The company charges commission to sellers and a small fee to buyers and it provides investors with a network effect that expands in value as each new seller and/or buyer comes into the fold.
While Ritchie Bros. Auctioneers has produced higher return on invested capital (ROIC) than Caterpillar over the past five years, it should move even higher in the coming years as it grows its online auction business through RitchieBros.com and EquipmentOne.com. The company's websites have enabled buyers to use the Internet to place bids anywhere and anytime, and that online business generated more than 40% of auction proceeds last year.
Ultimately, investors looking to invest in heavy equipment manufacturers like Caterpillar or Joy Global should think twice for now. While those large companies aren't going away by any means, and they will eventually see better days for their business, they also offer little upside given management projects sales to remain flat globally over the near term. Instead, investors should search for out-of-the-box ideas like Ritchie Bros. Auctioneers: Companies that can generate strong ROIC and increase their competitive advantage -- a network effect, in this case -- as their business grows.
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The article Considering Buying Caterpillar, Inc.? Why Investors Should Think Twice originally appeared on Fool.com.
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