Construction Stocks

Caterpillar Inc Valuation – February 2018 $CAT

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 Undervalued Stocks for the Enterprising Investor – August 2017.  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 Marketwatch): Caterpillar, Inc. engages in the manufacture of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. It provides technology for construction, transportation, mining, forestry, energy, logistics, electronics, financing, and electric power generation. It operates through the following segments: Construction Industries, Resource Industries, Energy & Transportation, Financial Products, and All Other. The Construction Industries segment supports customers using machinery in infrastructure and building construction applications. The Resource Industries segment responsible for supporting customers using machinery in mining and quarrying applications and it includes business strategy, product design, product management, and development, manufacturing, marketing and sales and product support. The Energy & Transportation segment supports customers in oil and gas, power generation, marine, rail, and industrial applications. The Financial Products segment line business provides a wide range of financing alternatives to customers and dealers for Caterpillar machinery and engines, solar gas turbines as well as other equipment and marine vessels. The All Other segments includes activities such as; the business strategy, product management and development, and manufacturing of filters and fluids, undercarriage, tires and rims, engaging tools, and fluid transfers. The company was founded on April 15, 1925 and is headquartered in Peoria, IL.

CAT Chart

CAT data by YCharts

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of CAT – February 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $94,374,317,018 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.35 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
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 -31.05% Fail
6. Moderate PEmg Ratio PEmg < 20 42.51 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 7.04 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 1.35 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 2.51 Fail
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

 

Stage 2: Determination of Intrinsic Value

EPSmg $3.73
MG Growth Estimate -4.25%
MG Value $0.00
Opinion Overvalued
MG Grade F
MG Value based on 3% Growth $54.10
MG Value based on 0% Growth $31.72
Market Implied Growth Rate 17.01%
Current Price $158.63
% 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 stability or growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings stability or 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 $5.79 in 2014 to an estimated $3.73 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 17.01% 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 $63.57. The company pays a dividend of $3.1 per share, for a yield of 2% Its PEmg (price over earnings per share – ModernGraham) was 42.51, which was above the industry average of 25.98. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-44.46.

Caterpillar Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of F.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$44.46
Graham Number $63.57
PEmg 42.51
Current Ratio 1.35
PB Ratio 7.04
Current Dividend $3.10
Dividend Yield 1.95%
Number of Consecutive Years of Dividend Growth 4

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2017
Total Current Assets $36,244,000,000
Total Current Liabilities $26,931,000,000
Long-Term Debt $23,410,000,000
Total Assets $76,962,000,000
Intangible Assets $8,311,000,000
Total Liabilities $63,265,000,000
Shares Outstanding (Diluted Average) 607,700,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $7.80
Dec2017 $1.26
Dec2016 -$0.11
Dec2015 $4.18
Dec2014 $3.90
Dec2013 $5.75
Dec2012 $8.48
Dec2011 $7.40
Dec2010 $4.15
Dec2009 $1.43
Dec2008 $5.66
Dec2007 $5.37
Dec2006 $5.17
Dec2005 $4.04
Dec2004 $2.88
Dec2003 $1.56
Dec2002 $1.15
Dec2001 $1.16
Dec2000 $1.51
Dec1999 $1.32
Dec1998 $2.06

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $3.73
Dec2017 $2.13
Dec2016 $3.19
Dec2015 $5.21
Dec2014 $5.79
Dec2013 $6.31
Dec2012 $6.20
Dec2011 $4.97
Dec2010 $3.96
Dec2009 $4.02
Dec2008 $5.08
Dec2007 $4.46
Dec2006 $3.66
Dec2005 $2.66
Dec2004 $1.86
Dec2003 $1.35
Dec2002 $1.31

Recommended Reading:

Other ModernGraham posts about the company

Caterpillar Inc. Analysis – 2015 Update $CAT
5 Undervalued Companies for Defensive Investors With High Dividend Yields – June 2015
5 Undervalued Dow Stocks to Research – June 2015
5 Undervalued Dow Components to Research – May 2015
Caterpillar Inc. Quarterly Valuation – April 2015 $CAT

Other ModernGraham posts about related companies

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Jacobs Engineering Group Inc Valuation – August 2016 $JEC
PPG Industries Inc Valuation – August 2016 $PPG
D.R. Horton Inc Valuation – August 2016 $DHI
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Fluor Corporation Valuation – August 2016 $FLR
Vulcan Materials Co Valuation – July 2016 $VMC
PulteGroup Inc Valuation – July 2016 $PHM
Sherwin-Williams Co Valuation – July 2016 $SHW
Cummins Inc Valuation – July 2016 $CMI

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.  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.

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