Caterpillar Inc. does not satisfy the initial requirements of the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio and insufficient earnings growth over the last ten years. The Enterprising Investor is concerns with the level of debt relative to the current assets. As a result, all value investors should explore other opportunities or proceed cautiously with a speculative attitude to the next part of the analysis, which is a determination of the company’s intrinsic value.
When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $4.97 in 2011 to an estimated $5.89 for 2015. This level of demonstrated growth supports the market’s implied estimate for annual earnings growth of 2.74% over the next 7-10 years.
In recent years, the company’s actual growth in EPSmg has averaged around 3.69% annually. The ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, but still returns an estimate of intrinsic value within a margin of safety relative to the current price, indicating that Caterpillar Inc. is fairly valued at the present time.
Disclaimer: The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.