Zacks_Analysts' Blog : Another Chinese JV for Caterpillar - Analyst Blog

Caterpillar Inc. (CAT), in line with its concerted efforts to expand its product line in China, has agreed to form a joint venture with a Chinese auto parts manufacturer, Shaanxi Fast Gear Co. The venture will build drivetrain systems and other components for Caterpillar’s machinery and produce a line of automatic transmissions for highway travel.

Caterpillar will hold a 45% stake in the joint venture, Fast Gear would have 51% and Shaanxi Fast Auto Drive Group Co. Ltd. would hold the remaining 4%.

The joint venture will provide Caterpillar with competitive drivetrain components and systems as well as an Asian source for its CX28 and CX31 transmissions. In addition to the production of Caterpillar machine components, the joint venture will build upon the existing Cat CX series on-highway transmission product line to expand globally.

Caterpillar had entered into a joint-venture agreement with AVIC Liyuan Hydraulics Co., Ltd., in October last year, to establish a company to design and manufacture medium- and heavy-duty hydraulic pumps and motors for the construction equipment industry.

The joint venture was aimed to provide components for use in Caterpillar products as well as third-party machinery and equipment, and enhance its supply base and key component capacity in support of its expansion plans in China.

Caterpillar’s strong brand name, pricing power and global dealer network enable it to take advantage of the growing need for infrastructure development worldwide. The company’s plans of opening new facilities and expanding existing operations, particularly in the emerging markets, will boost its long-term potential.

We nevertheless maintain our long-term Neutral recommendation given concerns over increased debt and interest burden due to the bridge loan taken for the Bucyrus International Inc. (BUCY) acquisition, weakness in non-residential construction and rising material costs. We currently have a Zacks #2 Rank (short-term Buy recommendation) on the stock.

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 three divisions – Machines, Engines and Financial Products. Caterpillar competes with the likes of CNH Global NV (CNH), Komatsu Ltd. (KMTUY) and Volvo AB (VOLVY).