CAT: Excerpts from Chief Executive Magazine in a profile piece on CAT's CEO, Jim Owens:
The global infrastructure boom has surely helped, but credit also goes to the company’s long-term recovery strategy that was hatched by Owens’ predecessors and is currently being executed by the 59-year-old Owens. The plan has included decentralizing the company, playing tough with the United Auto Workers, making bold investments in technology, streamlining manufacturing, emphasizing leadership development, and being able to catch up with a burst in demand that materialized two years ago.
Cat’s sales were up 33 percent last year, to more than $30 billion, and Owens is trumpeting projections of a further sales increase to more than $35 billion this year. (See charts, right.) Profits for 2004 were a record $2 billion, and Cat forecasts another 35 to 40 percent increase this year (bolstering the reasoning behind the company’s 22 percent dividend bump and two-for-one stock split as of July 13). Amid national hand-wringing over manufacturing employment, Cat has added a stunning 5,500 full-time hourly jobs in the U.S. compared with a year ago. Worldwide employment rose to 80,000 at the end of the first quarter compared with fewer than 71,000 a year earlier.
Nearly every major industry served by Cat—construction, mining, energy and marine—is solidly on the upswing. Caterpillar is ideally suited to exploit that with a product line that ranges from a small skid loader to the $2.5-million, 797B mining truck, with a hydraulically controlled operator’s seat, a 3,550-hp. engine, a payload of up to 400 tons and 12-foot-diameter tires. “We sure didn’t do it with flim-flam,” says Owens, with a deliberate manner that bespeaks his background as an economist. “Big iron is really moving, and production at most of our manufacturing facilities is up 35 to 50 percent for the year.” Owens is quick to admit that even he, with his economics background, didn’t foresee the speed and size of the upturn. “The stars have shone on us,” he says....
Purchasing is one major area that Owens quickly attacked. He dispatched purchasing executives to every global market, and they came back with new solutions to the bottleneck, such as buying Chinese steel. Cat recently found itself so desperate for alloyed steel for its gears that Owens okayed the purchase of a barge load of iron pellets sitting in the Mississippi River, knowing he could swap it for the coveted steel. “We were empowered to think and act as creatively as we could to solve this, as long as it was ethical,” says Dan Murphy, Cat’s vice president of global purchasing. “Jim said he’d make anything available that we needed.”
Owens himself took up schmoozing suppliers of especially tight goods, meeting a few times, for example, with Edouard Michelin, head of the French tire giant, to improve collaboration and discuss capacity constraints. He also met with top executives of Timken, which manufactures bearings for almost all Cat equipment.
At the same time, Owens also has worked to squeeze every possible improvement out of the Six Sigma approach that now pervades Caterpillar. Barton began Cat’s intense devotion to the manufacturing philosophy in 2001 as a way of driving down the company’s repair and warranty costs. That includes focusing Six Sigma methods “to prioritize which business units would get the iron from corporate to increase production,” Owens says. And the company had enough “black belts” that Owens could deploy some of them to suppliers to help figure out ways to break upstream production bottlenecks....
“The mark of Jim’s tenure has been how he pulled his team together quickly and got them to address a more rapid buildup of business than anybody had predicted.” ...
Owens has stepped up leadership-development activities for his executives; for example, Cat’s 30 vice presidents now spend one whole day together each year evaluating the company’s high-potential managers. “He’s steeped in the values of athletics and teamwork, and he creates a teamwork atmosphere,” says Stuart Levenick, one of Cat’s five group presidents. “He’s also an unassuming guy with small-town values, which plays well in our company—and globally.” ....
Owens wants to make Cat a higher-profile company. So, in a first for a Cat CEO, he joined analysts for the company’s quarterly conference call in April. He also iniated other corporate image-raising gambits, such as attending major trade shows so he can speak directly to customers and dealers. One reason? Owens hates the fact that Wall Street doesn’t give Cat its due. “He was flying back from Europe and complaining to me about that the other day,” says Bill Osborn, a Cat director for five years, who is chairman and CEO of Northern Trust. “But Wall Street thinks there’s going to be a slowdown, and even though you tell them otherwise, they factor it in and think the music will stop. I told him, ‘Jim, don’t worry about it. Just keep producing those earnings.’” ...
Why Wall Street Has Cat Wrong
Owens says investors don't understand its strengths.
When Jim Owens became CEO of Caterpillar in February 2004, he inherited a company experiencing explosive growth. How long can it last? Here are excerpts from a conversation:
You’ve said Caterpillar has some building blocks that will enable the company to prosper over the long haul. What are they?
The strength of our brand and our product line is one. Another is that we’re investing more in technology than in anything else; we spend $4 million every day on our product line. Our ACERT engine technology is one result of that kind of investment. We have a global footprint, with a manufacturing presence on every continent but one. We’re naturally hedged for currency fluctuation. We have a longstanding history of financial integrity and good governance, a conservative balance sheet and strong funding of our pension plans.
Do you think Wall Street might be underestimating Cat’s potential?
In the 1970s, our price/earnings ratio was slightly better than that of the S&P 500. That’s a high standard, but I think now we’re a better company than the average S&P 500 company. But their average P/E is 16 to 19 whereas we’ve been trading at only 11 to 12 times earnings. Given the global strength of our brands and product lines, our manufacturing base and our leadership, we’re undervalued.
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