Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – August 2016. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a stock analysis showing a specific look at how Caterpillar Inc (CAT) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Caterpillar Inc. is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The Company operates through its three product segments: Resource Industries, Construction Industries, and Energy & Transportation. It also provides financing and related services through its Financial Products segment. Its Construction Industries segment provides machinery for infrastructure and building construction applications. Its Resource Industries segment offers machinery for mine and quarry applications. Its Energy & Transportation segment offers reciprocating engines, generator sets, gas turbines and turbine-related services, diesel-electric locomotives and other rail-related products and services. Its Financial Products segment conducts its business through Caterpillar Financial Services Corporation (Cat Financial). Cat Financial provides retail and wholesale financing alternatives for Caterpillar products.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$48,112,506,170||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||1.24||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||-1.44%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||18.75||Pass|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||3.19||Fail|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||1.24||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||3.73||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Fail|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||-4.25%|
|MG Value based on 3% Growth||$63.92|
|MG Value based on 0% Growth||$37.47|
|Market Implied Growth Rate||5.13%|
|% of Intrinsic Value||N/A|
Caterpillar Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the high PB ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $6.2 in 2012 to an estimated $4.41 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 5.13% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Caterpillar Inc. revealed the company was trading above its Graham Number of $41.25. The company pays a dividend of $3.08 per share, for a yield of 3.7%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 18.75, which was below the industry average of 20.76, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-50.05.
Caterpillar Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of D+.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$50.05|
|Number of Consecutive Years of Dividend Growth||3|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||6/1/2016|
|Total Current Assets||$33,606,000,000|
|Total Current Liabilities||$27,183,000,000|
|Shares Outstanding (Diluted Average)||588,600,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$2.90|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$4.41|
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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. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.