Caterpillar Inc. (CAT) Annual Valuation – 2014

500px-Caterpillar_logo.svgBenjamin 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 5 Low PEmg Companies for the Defensive Investor.  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 specific look at how Caterpillar Inc. (CAT) fares in the ModernGraham valuation model.

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 and 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. In October 2012, Finning International Inc acquired from Caterpillar of the former Bucyrus distribution and support business in its dealership territory.

CAT Chart

CAT data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  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 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: 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

Key Data:

MG Value $182.55
MG Opinion Undervalued
Value Based on 3% Growth $94.63
Value Based on 0% Growth $55.47
Market Implied Growth Rate 3.74%
Net Current Asset Value (NCAV) -$40.37
PEmg 15.98
Current Ratio 1.40
PB Ratio 3.20

Balance Sheet – 12/31/2013

Current Assets $38,335,000,000
Current Liabilities $27,297,000,000
Total Debt $26,719,000,000
Total Assets $84,896,000,000
Intangible Assets $10,552,000,000
Total Liabilities $64,085,000,000
Outstanding Shares 637,820,000

Earnings Per Share

2014 (estimate) $6.10
2013 $5.75
2012 $8.48
2011 $7.40
2010 $4.15
2009 $1.43
2008 $5.66
2007 $5.37
2006 $5.17
2005 $4.04
2004 $2.88
2002 $1.15

Earnings Per Share – ModernGraham

2014 (estimate) $6.53
2013 $6.31
2012 $6.20
2011 $4.97
2010 $3.96
2009 $4.02

Dividend History

CAT Dividend Chart

CAT Dividend data by YCharts

Conclusion:

In the last several months, Mr. Market has considerably raised his price for Caterpillar, and it now has a higher PEmg and PB ratio than it did before.  This indicates the company presents a higher risk than previously and as a result, the company is no longer suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is also concerned with the low current ratio, and the Enterprising Investor is concerned with the level of debt relative to the current assets.  Value investors following the ModernGraham approach based on Benjamin Graham’s methods should keep an eye on the company, as if the price falls back down it may slip back into suitability for investment.  In the meantime, check out some other opportunities such as through ModernGraham’s valuation of Deere & Co. (DE) and ModernGraham’s valuation of Joy Global Inc. (JOY).  From a valuation perspective, the company still appears undervalued after growing its EPSmg (normalized earnings) from $3.96 in 2010 to an estimated $6.53 for 2014.  This demonstrated level of growth outpaces the market’s implied estimate of 3.74% and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Caterpillar Inc. (CAT)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author held a long position in Deere & Co. (DE) but did not hold any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from wikipedia; this article is not affiliated with the company in any manner.


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