How Caterpillar Makes Its Money

Analyzing how Caterpillar Inc. (NYSE: CAT) makes money is a useful exercise for investors because it sheds light on what investors need to know before buying the stock right now. In a nutshell, the stock's near-40% rise in the past year has been propelled by its positive earnings momentum, which is largely due to an improvement in its end markets. So in order to take a view on whether this can continue, it's useful to know how Caterpillar makes money.

A gas compression engine. Image source: Caterpillar Inc.

It's long been known as a cyclical stock, but not all economic cycles are equal. Caterpillar's main end-market exposures -- construction, mining (referred to by Caterpillar as "Resource Industries") , oil & gas power generation, and transportation -- make it unsuited as a catch-all stock to be bought as a proxy for economic growth. In fact, buying the stock is, whether intentional or not, an expression on the growth prospects of its end markets.

Source: Fool.com