Machinery Stocks

Caterpillar Inc. Quarterly Valuation – April 2015 $CAT

500px-Caterpillar_logo.svgCaterpillar Inc. (NYSE:CAT) presents an intriguing investment possibility for value investors, as the company has maintained very strong earnings growth over the last few years that may not be properly priced into the market price. Benjamin Graham, the father of value investing, taught that looking at the price cannot be the sole factor in investment decisions, as the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment’s merits. Here is a look at how the company fares in the ModernGraham valuation model.

The model is inspired by the teachings of Benjamin Graham, and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.

In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another. By using theModernGraham method, one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.

CAT Chart

CAT data by YCharts

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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 1/3rd over the last 10 years using 3-year averages at the beginning and end of the period – PASS
  6. Moderate PEmg (price over normalized earnings) 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 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:

Recent Price $84.60
MG Value $176.91
MG Opinion Undervalued
Value Based on 3% Growth $93.56
Value Based on 0% Growth $54.85
Market Implied Growth Rate 2.31%
Net Current Asset Value (NCAV) -$47.07
PEmg 13.11
Current Ratio 1.39
PB Ratio 3.12

Balance Sheet – December 2014

Current Assets $38,867,000,000
Current Liabilities $27,877,000,000
Total Debt $27,784,000,000
Total Assets $84,681,000,000
Intangible Assets $9,770,000,000
Total Liabilities $67,935,000,000
Outstanding Shares 617,500,000

Earnings Per Share

2014 $5.88
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

Earnings Per Share – ModernGraham

2014 $6.45
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


Caterpillar Inc. passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only initial concern is the low current ratio, and while the Enterprising Investor is concerned by the level of debt relative to the current assets, those concerns are overlooked since the company meets the more conservative Defensive Investor criteria. As a result, all value investors should feel very comfortable proceeding 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, the company has grown its EPSmg (normalized earnings) from $3.96 in 2010 to $6.45 for 2014. This is a strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of only 2.31% annually over the next 7-10 years. In fact, the historical growth is around 12.61% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.


2 thoughts on “Caterpillar Inc. Quarterly Valuation – April 2015 $CAT

  1. Reading the review of CAT. Re: your EPS growth rate comments in this and other reviews. You often say that the EPSmg (normalized earnings) growth is higher (or lower?) than the markets implied estimate of earnings growth. Where are the values coming from. I found a Graham formula for calculating a stock’s intrinsic value; are you simply solving the equation for “g”?

    1. Yes, the market implied growth rate is taken by using the valuation formula and solving for growth with the current market price in place of the “value” variable.

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