Caterpillar & Terex Win Defense Deals

The construction and equipment manufacturers Caterpillar Inc. (CAT - Analyst Report) and Terex Corp. (TEX - Analyst Report) received contracts from the Defense Logistic Agency this week.

The Pentagon announced that Terex received a $5.6 million contract from the agency for a rock crusher jaw plant, while Caterpillar received two contracts, one for providing adverse terrain forklifts and the other for dump trucks. The contracts are worth approximately $14 million and $6 million, respectively.

Currently, both companies are experiencing weak demand for their products. Caterpillar reported a year-over-year sales decline of 32%, while Terex’s sales were down 51% during the first half of 2009.

Uncertainty surrounding the global economic recovery is leading to low activity levels in the construction, mining and other end markets. This is leading to cancellation or rescheduling of orders in these businesses. We do not expect to see substantial recovery in any of these markets for the next couple of quarters.

In response to tough market conditions, both companies have initiated various actions to cut down costs and reduce inventories. Terex aims to cut costs in excess of $300 million per quarter and reduce inventories by more than $500 million by the end of 2009. However, we believe the company will not be able to fully offset the negative impact of lower sales on its earnings. We expect Terex to post a net loss for the year.

Caterpillar, on the other hand, is well equipped to weather the recessionary conditions and remain profitable in this challenging environment. The company is aggressively cutting down costs and is turning to lean manufacturing. With its strong brand name, pricing power, focus on R&D, and global dealer network, we believe Caterpillar is well positioned to take advantage of the growth opportunities once the market recovers.

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