Wednesday, May 16, 2007

Caterpillar and the future of remanufacturing

“Remember that one-word career advice given to college graduate Benjamin Braddock in the classic film The Graduate?” asks David Fried. “Plastics.”

The editor of The Buyback Letter states, “Now, we have a new suggestion for a single word that is going to transform the way business is done in the future: remanufacturing. And the world’s largest remanufacturer is Caterpillar (NYSE: CAT).

“Remanufacturing is the ultimate recycling – actually, similar to recycling, but much more extensive. It involves taking a product apart; cleaning, fixing or replacing worn parts; upgrading the technology where possible; and then putting it back together.

“And noone does this as extensively and consistently as Caterpillar, which we own in our portfolio. Caterpillar, as you probably know, manufactures construction and mining equipment, diesel and natural gas engines, and industrial gas turbines.

“Cat launched its remanmanufacturing –- or reman -- business in the 1970s and today processes more than 2 million units annually and recycles more than 100 million pounds of remanufactured products each year.

“Reman products can cost, on average, half of what new ones do, and the business can be very profitable for companies that do it well, like Cat. Its remanufacturing unit tallied more than $1 billion in sales in 2005 and Cat expects it to grow 15% annually. Bottom line, it’s one of Caterpillar's fastest-growing divisions.

“Cat is heavily into reman research. But equally important is that its product designers purposefully consider remanufacturing during the front-end of the manufacturing process. For example, a thicker part might cost $1 more to produce, but if they can get two to four reman lives out of it, it will be well worth it.

“Think about it: generally, 70% of the cost to build something new is in the materials and 30% of it in the labor. Remanufacturing turns that equation on its head. In most cases, according to reman companies, the overall cost usually runs less than 70% of building a brand new product.

“As if all that isn’t enough, remanufacturing is also simply the right thing to do from an environmental perspective – something even avowed capitalists are considering these days as we collectively realize the limitations of our planet.

“Caterpillar has been solidly extending its reman reach for several years. In 2004 Cat bought two reman companies that serve the auto industry, and reopened a British plant that had been converted to remanufacture military tanks, railroad engines and truck transmission systems.

“Last year, Cat became the first foreign company licensed to assist the Chinese government in the development of a remanufacturing industry. Cat also opened a plant in Shanghai that will function as its Asian remanufacturing center for old motors and hydraulic pumps.

“Overall, Caterpillar is looking very good to us. The company reported better-than-expected quarterly earnings and raised its outlook, saying ‘exceptional growth’ outside North America was offsetting weakness in the U.S.

“Also, take note that there have been no insider sales at Cat for the trailing six months, a fairly extraordinary thing given the size of the company. We also are bullish on Cat because of its $7.5 billion stock buyback over the next 5 years.

“It is the fourth program of stock buybacks since 1995, and during that 12-year period, Cat has returned $8.5 billion to stockholders through repurchasing. In the last 12 months, Caterpillar has reduced shares outstanding by 3.7%.”

posted at 11:46 AM