| Factor | Capital Goods (e.g., Caterpillar) | Transportation (e.g., Union Pacific) |
|---|---|---|
| Demand Driver | Business confidence and corporate capital expenditure (capex) budgets. | Real-time economic activity, trade volumes (e.g. Cass Freight Index), and consumer spending. |
| Revenue Model | Sale of expensive, long-lived equipment + high-margin aftermarket parts and services. | Fees charged for moving goods or people (e.g., per container, per ton-mile). |
| Lead Time & Visibility | Long lead times. Orders are placed months or years in advance, creating a backlog that provides high revenue visibility. | Short lead times. Demand is often immediate, providing low revenue visibility. |
| Key Leading Indicator | Book-to-Bill Ratio & Backlog. | Freight volumes & Load Factors. |
| Primary Expense | Raw materials (steel), components, and manufacturing labor. | Fuel and labor. |
Deep Dive: Capital Goods vs. Transportation
Within the broader Industrials sector, Capital Goods and Transportation companies are both cyclical, but their business models and key drivers are different. Capital Goods are tied to business investment cycles (capex), while Transportation is tied to the real-time flow of goods and people across the economy.
Comparative Business Models
Cyclicality and Credit Perspective
Capital Goods: Long, Drawn-Out Cycles
Capital goods companies are typically "late-cycle." Demand for their products only picks up well into an economic expansion, when businesses are confident enough to make large, long-term investments. The flip side is that their large backlogs provide a significant cushion during a downturn. Even as new orders slow, the company can continue to work through its existing backlog, providing revenue visibility for several quarters or even years.
A key credit positive is a large, stable, and high-margin aftermarket business. Even when companies aren't buying new machines, they still need to buy spare parts and service their existing fleet, providing a defensive stream of cash flow that supports credit quality through the cycle.
Transportation: Short, Sharp Cycles
Transportation companies are "early-cycle." Demand for their services moves in lockstep with the broader economy. Freight volumes can fall quickly at the start of a recession and rebound just as quickly at the first sign of recovery. This provides very little forward revenue visibility outside of long-term contracts.
Credit analysis focuses heavily on operational efficiency (e.g., the Operating Ratio for railroads) and the ability to manage volatile fuel costs and high fixed labor expenses through the cycle. Companies with flexible cost structures are better positioned to weather downturns.