Valuation: Caterpillar Inc. (CAT)

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Company Profile (obtained from Google Finance): Caterpillar Inc. (Caterpillar) is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. It operates in two segments: Machinery and Power Systems, and Financial Products. Machinery and Power Systems represents a total of Construction Industries, Resource Industries, Power Systems and All Other segments and related corporate items and eliminations. Financial Products includes the Company’s Financial Products Segment. This category includes Cat Financial and Caterpillar Insurance Holdings Inc. Effective March 1, 2012, it announced that Caterpillar Japan Ltd. acquired Caterpillar Tohoku Ltd. In August 2012, Platinum Equity, LLC. acquired a majority interest in Caterpillar Logistics Services. Caterpillar will retain a 35% interest in the business. In October 2012, Finning International Inc acquired from Caterpillar of the former Bucyrus distribution and support business in its dealership territory.

Defensive and Enterprising Investor Tests (explanation):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (explanation):

MG Value $160
MG Opinion Undervalued
Value Based on 3% Growth $91
Value Based on 0% Growth $53
Market Implied Growth Rate 2.48%
Net Current Asset Value (NCAV) -$44.70
PEmg 13.46
Current Ratio 1.36
PB Ratio 3.09

Key Data:

Balance Sheet – 6/30/2013

Current Assets $40,805,000,000
Current Liabilities $29,919,000,000
Total Debt $25,680,000,000
Total Assets $87,375,000,000
Intangible Assets $10,578,000,000
Total Liabilities $69,754,000,000
Outstanding Shares 647,620,000

 Earnings Per Share – Diluted

2013 (estimate) $5.45
2012 $8.55
2011 $7.48
2010 $4.24
2009 $1.32
2008 $5.66
2007 $5.37
2006 $5.17
2005 $4.04
2004 $2.88
2003 $1.56
2002 $1.15

Earnings Per Share – Modern Graham

2013 (estimate) $6.25
2012 $6.25
2011 $5.00
2010 $3.96
2009 $3.98
2008 $5.08

Conclusion:

Caterpillar is a very strong company based on its financials, and may be suitable for the defensive investor (and hence an enterprising investor as well).  A prudent and intelligent investor should do more research, but it also appears that Caterpillar may be undervalued based on the amount of growth seen in its earnings per share over the last several years.

What do you think?  Will Caterpillar continue to see earnings growth at a rate above the 2.5% the market is implying?

Photo Credit:  Andrew Magill


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