The Motley Fool: The Foolish Four

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Week in Review
Plus, more on CAT's business

Notice: Due to the market holiday tomorrow, the new Foolish Workshop rankings will not be officially published until Monday morning. However, they will be posted on the Foolish Workshop message board by 6:30 p.m. tomorrow.

Alexandria, VA (April 1, 1999) -- Tonight, we'll start out with our regular weekly news review of our Foolish Four companies and then continue our bit-by-bit study of Caterpillar.

Not much noteworthy to report on Minnesota Mining and Manufacturing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MMM)") else Response.Write("(NYSE: MMM)") end if %>, though apparently they recently sold a small bank they owned in Minnesota. Why this highly diverse consumer products company ever owned a bank in the first place is anybody's guess.

Moving on, International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %> filed its annual report, or 10-K, with the SEC yesterday, which included some minor accounting revisions to its 1998 earnings but nothing that changed the earnings report they issued in January. You can access the 10-K at FreeEDGAR, an excellent site, but not at IP's own website (at least not as of Thursday afternoon). Tsk, tsk, IP, what are we gonna do with you....

J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> has apparently taken advantage of recent economic turmoil to regain its top spot in the Latin American bond market, which according to Bloomberg is "critical for helping J.P. Morgan recover after losses in Russia and Asia walloped earnings." Morgan is also likely to benefit from the quicker-than-expected recovery (which is still in progress, to be sure) of the infamous Long-Term Capital Management hedge fund, which J.P. Morgan helped bail out.

Meanwhile, rumors abound that Blount International Inc., a maker of chain saws, lawn mowers, and "timber harvesting" equipment, may be purchased by a large, unnamed heavy equipment corporation, with Caterpillar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %> as a likely suspect. Blount could be a good addition to Caterpillar's portfolio, though its 1998 earnings of approximately $828 million wouldn't exactly make a tremendous difference to Caterpillar, which recorded $21 billion in revenues last year. Either way, until we find out whether Caterpillar is actually buying the company, there's no point in speculating on it much further.

Instead, let's return to our quick survey of Caterpillar's business. Soon we will look at Caterpillar's balance sheet and make some comparisons to our other Foolish Four stocks, but before delving more into the numbers, we should have an idea what kind of company we're looking at, what its lines of business are, and what it sees in its near future.

This is where an annual report can actually be useful. Caterpillar's Annual Report for shareholders clues us in to the fact that the company is more than just big trucks and loaders.

In fact, Caterpillar has three lines of business: machinery, engines, and financial products. Machinery is comprised pretty much of the large equipment we generally associate with the company, and in 1998 it accounted for 64% of Caterpillar's revenue and approximately 68% of its operating income. Caterpillar's machinery is used in the construction, mining, agricultural, and forestry industries, almost all of which have been hit by flat or declining commodities prices recently. Nevertheless, Caterpillar had some interesting developments in its machinery division in 1998, with the introduction of its newest mining truck, the 797, the largest off-road truck in the world. At 24 feet high and 30 feet wide, it's capable of carrying a 360-ton payload and could crush all competition at your average monster-truck rally, though it's unlikely any arenas could handle it. There's no word on whether a Sport Utility Vehicle version will be introduced soon.

Caterpillar also introduced its first "compact machines" in 1998. These are smaller versions of basic construction machines, like loaders and excavators, some as small as 6 1/2 feet tall and 5 feet wide. Caterpillar argues that the "compact machine" market is growing "three to four times faster" than the "traditional construction machines" market, resulting in an 11 percent growth rate in "an almost $4 billion industry." We'll keep our eyes open for future information on compact machine growth to see if this pans out. Caterpillar hasn't specified any numbers for compact machine sales so far. Perhaps its fiscal 1998 10-K, just filed Wednesday, will have more info. Technically, Caterpillar filed a 10-K405, which differs from a plain ol' 10-K primarily in its ability to needlessly confuse new investors who are just looking for 10-Ks.

Caterpillar's engines division accounted for 31% of 1998 revenue and 22% of operating profit. This division makes engines for trucks, tugboats, locomotives, and also builds power-generating turbines. In 1998, Caterpillar acquired Perkins Engines, a European concern that helped make Caterpillar the world's leading manufacturer of diesel engines.

Finally, Caterpillar's financial products subsidiaries provided about 5% of 1998 revenue and 10% of operating profits. Clearly, this division has some decent operating margins and is worth a closer look. Caterpillar is hoping that its Caterpillar Financial and Caterpillar Logistics subsidiaries -- both grouped, along with other entities, under its Financial Products division -- will provide some non-cyclical business that's not as susceptible to economic fluctuations as its heavy equipment businesses are. We'll take a separate, more in-depth look at Caterpillar's financial business later -- when we actually understand it.

Finally, Happy April Fool's Day!

Today's Stock Lists | 1999 Dow Returns

04/01/99 Close

Stock Change Last -------------------- CAT +1 46.94 JPM +1 1/8 124.50 MMM +2 72.75 IP +1 5/16 43.50

Day Month Year History FOOL-4 +2.18% 2.18% 5.08% 6.65% DJIA +0.47% 0.47% 7.48% 7.05% S&P 500 +0.57% 0.57% 5.57% 5.82% NASDAQ +1.28% 1.28% 13.71% 15.27% Rec'd # Security In At Now Change 12/24/98 9 JP Morgan 105.51 124.50 18.00% 12/24/98 24 Caterpillar 43.08 46.94 8.95% 12/24/98 22 Int'l Paper 43.55 43.50 -0.11% 12/24/98 14 3M 73.57 72.75 -1.11% Rec'd # Security In At Value Change 12/24/98 9 JP Morgan 949.62 1120.50 $170.88 12/24/98 24 Caterpillar 1034.00 1126.50 $92.50 12/24/98 22 Int'l Paper 958.12 957.00 -$1.12 12/24/98 14 3M 1030.00 1018.50 -$11.50 Dividends Received $15.04 Cash $28.26 TOTAL $4265.80

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