Industrials Caterpillar Inc. (NYSE. CAT) · 2018-04-18 · construction machinery, resource...
Transcript of Industrials Caterpillar Inc. (NYSE. CAT) · 2018-04-18 · construction machinery, resource...
Important disclosures appear on the last page of this report.
Krause Fund Research
Spring 2018
Industrials Recommendation: HOLD
Analysts
Daniel Rosenberger
Charlie Lynch
Steve Diaz
Delun Pan [email protected]
Company Overview
Caterpillar Inc. is a heavy machinery manufacturer
operating around the world in three distinct sectors:
construction machinery, resource equipment, and energy
and transportation systems. Its signature bright-yellow
machines have become a staple in construction sites and
many industrial applications. Its independent dealer
network and global supply chain allows for Caterpillar to
operate in over 190 countries in 3,500 locations, creating
over $45B in total revenues in 2017.
Stock Performance Highlights
52 Week High 173.24
52 Week Low 92.98
Beta Value 1.49
Average Daily Volume 6,206,627
Share Highlights
Market Capitalization 91.861 B
Shares Outstanding 596 M
Enterprise Value 118.42 B
EPS (FY 2017) $1.27
Forward P/E Ratio 26.0
Dividend Yield 2.06%
Dividend Payout Ratio 56.85%
Company Performance Highlights
ROA .99%
ROIC 9.33%
Sales 45.565 b
YoY Sales Growth (FY ‘16-‘17) 17.9%
Financial Ratios
Current Ratio 1.35
Debt to Equity 368.99%
Caterpillar Inc. (NYSE. CAT)
April 17, 2018
Current Price $152.14
Target Price $160-165
Key Investment Highlights
• Increasing order volume – Carrying over from 2018,
Caterpillar is looking to continue to capitalize on
increased order volume and a favorable economic
setting. Strong GDP growth as well as considerable
order backlog will continue the creating of new heavy
industrial machines.
• Commodity markets rebounding – Following
commodity markets crashing in 2016, Caterpillar is
capable of refilling demand as commodity prices
continue to rise in 2018. Latin American mining
operations are expected to increase substantially.
• Construction Growth in 2018 – North American
construction growth is set to increase another 4-6% in
2018, based on increased demand in single-family
home construction and increased infrastructure
funding.
• Limited Access to Capital Markets – Looking at the
future interest rate environment and a flattening yield
curve, demand for Caterpillar products is set to
decrease as it becomes more expense for customers to
finance the purchase of expensive, large machinery.
• Innovation within the Industry – Market share in the
heavy machinery industry in extremely tight and the
ability to create competitive advantages through
research and development, such as automation and
remote operation capabilities are key to controlling
future market share.
One Year Stock Performance
source: CNBC
Important disclosures appear on the last page of this report.
ECONOMIC ANALYSIS
GDP (Strength in the Economy)
GDP is used as a relatively strong indicator of the
Industrial sector due to its sensitivity to the industry.
With the large investments that we see in the sector,
clients are prone to purchase these goods while GDP is
increasing. As the chart below reflects, the industrials
sector has had a steady growth over the past three years,
from approximately $487 in April of 2014 to $615 as of
April 2018. The lighter blue line represents the
Industrial sector, while the dark blue represents the S&P
500. The similarity between the S&P 500 and the
Industrials sector indicates a high degree of correlation,
and helps analysts predict, on a more specific time line,
the adjustments that will be seen by the Industrial
sectors.
S&P 500 Industrials Growth (3 yr.)
S&P Dow Jones Indices1
GDP Estimates within 6 Months
The fourth quarter 2017 GDP beat estimates and came in
at 2.9% after ending 2016 at 1.8%. This GDP growth
fully explains the increase in the stock market as we saw
from September into the beginning of January. Those
increases were the market reacting to the new tax law
that was introduced by the Trump administration. Within
the first six months we are expecting to see an increase
of GDP growth to 3.1% due to increased spending by
companies taking advantage of new tax laws.
Trading Economics2
Global Real GDP
We believe that the GDP will continue to grow and will
reach a growth range of 3.3%-3.7%. We are expecting
the new tax bill to raise GDP with an increase in
consumer spending and stronger business investments.
We are also expecting manufacturers to benefit from
stronger exports as the global economy continues to
strengthen in the future. Because a large part of
Caterpillar’s revenues comes from overseas sales
(roughly 54%), it is important that we recognize the
Global GDP and factor this into our forecasts. The
global real GDP growth rate is currently sitting at 3.7%,
with a general consensus that this rate will not change
drastically within the next year staying consistent at
3.7%.
Interest Rates
Interest rates today are extremely important to the
economy because many companies need to borrow
capital for their investments. Currently, the 10-year
interest rate on a U.S. treasury bond is sitting at 2.83%,
which is the rate most companies base their borrowing
ability on. The Fed recently increased the short-term
rates from 1.25%-1.50% to a range of 1.5%-1.75%, the
first rate hike of three or possibly four that we expect to
see this year. Infrastructure, capital expenditures,
agriculture, and transportation sectors all rely on
borrowing capital to finance various projects. If interest
rates continue to grow, companies will not borrow as
much capital to invest in their projects and we could
quite possibly see a decrease in Industrial
manufacturing, which in turn could lower GDP.
Historical 10-yr Treasury Rates
U.S. Department of Treasury3
Exchange Rates
Exchange rates in today’s market are extremely
important due to the increasing globalization of
companies, specifically the increase in Industrial
companies around the world. Exchange rates that are
focused on most are the Japanese Yen, the Euro, and the
Important disclosures appear on the last page of this report.
U.S. Dollar. Currently, the Japanese yen is trading at
$107.34 per US Dollar and the Euro is trading at $0.81
per US Dollar. Generally, when companies are
generating revenues over seas, they will keep the
revenue in the respective companies.
Tax Rates
This year marks a big year in economic history with the
new tax bill that was introduced by President Trump’s
administration. This bill decreased the top corporate tax
rates from the 35% rate we have had since 1986 and
decreased this rate to 21%. Following the decrease in the
tax rate, we expect an increase in foreign tax benefits
that we receive from -6.4% to about -1%. This is due to
the United States having a tax rate that is more in line
with a majority of other countries we trade with. We
anticipate seeing a decrease in the amount of deferred
taxes that companies keep on their balance sheets
moving forward. With this new tax rate, we will see
higher net income reported for companies and increase
their balance sheet.
Unemployment
Unemployment is at an all-time low of 4.1% since 2001,
and has been at this level since October 2017. With
unemployment so low, this can cause some issues in
terms of labor costs for companies. With unemployment
staying low, the ability to find new employees decreases
which means labor costs will increase in order to attract
new workers. As labor costs increase, companies will
need to increase their product prices to cover the
increase in labor. We already see a small increase in
hourly earnings from the past quarter, increasing from
2.6% to 2.7%.
Trading Economics4
We are expecting a small increase in unemployment
over the next year to 4.4%. We expect the number of
people in the work force to increase with people who are
currently not in the work force but who see the stagnant
rate and are drawn back to the work force. As the
number of people within the work force increases, we
are also expecting GDP to rise with the increase in goods
and services being produced.
INDUSTRY ANALYSIS
Industry Overview
The industrial machinery sector holds a large spectrum
of sub-industries. Caterpillar operates under the heavy
machinery sector. For our purposes we will be analyzing
three specific sub-industries within the sector:
construction machinery, mining and resource equipment,
and energy and transportation machinery. However,
these sub-industries tend to have similar characteristics
when considering key drivers, trends and environments.
Companies within these sub-sectors, including
Caterpillar, are extremely sensitive to the global
economy and its health largely due to their global
positioning and historical correlation with markets. In
order to sell their products effectively, companies use
independent dealers to distribute and sell their products.
Lastly, due to consolidation, many of these companies
have a large presence in many different sub-industries
and therefore may be difficult to compare.
Key Industry Drivers
GDP Growth
Heavy machinery has a high dependency on stable
market conditions. Consistent growth levels and a stable
economic environment, including consistent GDP
growth, increases product demand because consumers
can more accurately predict if they will be able to
commit to large capital expenditures. For example, total
industrial production has closely tracked real GDP in
recent years and we can expect this trend to continue
looking forward.
St. Louis INDPRO and GDPC1 Indexes5,6
Commodity Prices
Companies in the sector are highly sensitive to changes
in certain commodity prices, specifically steel.
Commodity prices are relatively stable through recent
times, however with recent import tariff plans by
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Real GDP Total Industrials Production
U3 Unemployment Rate 2014 - Today
Important disclosures appear on the last page of this report.
President Trump, we see large changes in steel prices
within the next year. As of this report, there is an
announced 25% tariff on steel and a 10% tariff on
aluminum imports, which would result in an anywhere
from a 6-20% decrease in EPS estimates for companies
in the industrial machinery sector, according to analysts
at J.P. Morgan7. However, from our perspective, we see
the 25% tariff as a worst case scenario and recommend
that these tariffs be met with a high level of skepticism
until future advancements in tariff talks are made.
Hot-rolled Coil Steel from 2011 – Today8
Within the next year, we see steel prices continuing to
increase but at a slower rate. This will inhibit growth
within the industry in the short term, however if the
recent easing of trade war talks is any sign, we could see
this recent run up in prices reverse.
Capital Spending
Sales volume in the industrials sector is heavily reliant
on capital expenditures. Customers, both individuals and
corporations, rely on favorable capital markets in order
to make heavy machinery purchases. Recent years have
been a great environment for capital spending. With
equity markets at all-time highs and interest rates at
extreme lows, we saw many companies take advantage
and capital spending flourish. Looking ahead, with fed
rate hikes scheduled to take place, upward pressure on
interest rates is causing a final boost in capital spending
levels. We see this cycle in capital expenditure growth
coming to an end in 2018 and expect a decrease in later
years as the effects of increasing interest rates reduce
capital spending.
Industry Trends
Increased Order Volume
Order volume within the industry has increased
dramatically in 2018 and will serve as strong support for
continued revenue growth in the upcoming year.
Purchasing Managers Index (PMI)
The PMI index is a monthly measure of five seasonally
adjusted diffusion indexes. Each measure is evenly
weighted; the PMI is comprised of new orders,
production, employment, supplier deliveries, and
inventories. A measurement over 50 indicates improving
conditions.
ISM Purchasing Managers Index8
Through 2017 and further into 2018, PMI has been
considerably stronger with an increase in new orders and
production along with low unemployment.
New orders are set to settle before the end of 2018 as
capital spending slows, however production and supplier
deliveries will remain high as orders are fulfilled.
New Orders
New orders are a key statistic to understanding the
current demand environment. The Durable Goods report
for Manufacturers’ is a figure used to see new orders in
the last month. In 2018, we have seen strong increases in
new orders with a 7.4% increase in new, nondefense
capital goods orders.10
Order Backlog
Order backlog is an indicator for expected future
revenues. It is the accumulation of unshipped orders. In
2018, we’ve seen a strong trend of increasing backlog
among manufacturing firms. Based on the Institute for
Supply Management’s Backlog Index, March and
February registered 59.8% (50% indicates normal).11
Date % Higher % Same % Lower Index
Mar-18 32.1 55.4 12.5 59.8
Feb-18 31.8 56 12.2 59.8
Jan-18 27.8 56.8 15.4 56.2
Dec-17 25.6 58.6 15.9 54.9
Order Backlog Index from ISM11
On average, 30 percent of manufacturing firms reported
higher order backlogs. Caterpillar, for example, reported
a $3.9 billion increase in order backlog for the 2017. We
see these increases in backlog as an effect of the current
stable economic environment. As noted before, the
capital spending trend in the last 12 months has pushed
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Important disclosures appear on the last page of this report.
order volume and created a healthy amount of order
backlog for the coming year and even further into 2019.
Competitive Environment
The heavy machinery industry as a whole is moderately
fragmented. We see competition in this sector vary
heavily between companies depending on geography and
even individual orders. Therefore, comparing companies
can become quite difficult when they may compete in
complete different areas of the world. As with any
industry, price competition is to be expected, however,
the machinery industry also competes based on the depth
of their product offerings, such as their ability to fulfill
the customer’s wants and their compatibility with the
customer’s facilities or needs. When considering larger
sales to other companies or governments, product
compatibility is the key determinant in whose product
gets bought. Companies that can adapt their products or
diversify their product line in order to fit multiple
customer’s pre-existing factory footprints have a large
competitive advantage over others.
Industrial Automation
Research and development in the heavy machinery
sector has had a specific focus to create and improve
automation within the construction and mining
industries. Companies advance the idea that the
automation of processes will reduce labor costs, improve
consistency in product quality, reduce waste, and make
available real-time feedback and diagnostics for
increased job efficiency.
Currently, the industry’s level of automation is
constricted. Applications involving autonomous use are
limited to repetitive tasks and the types of technology
used are similar to that of self-driving vehicles, such as
GPS and a mix of RADAR and LiDAR sensors.12 The
mining industry is one of the biggest benefiters of such
technology. Bulldozing, hauling materials, and remote
operation in underground environments are key
examples of modern-day applications.
In the future, we see automation as a major competitive
advantage in the industry. The benefits of eliminating
human error for customers and at the same time reducing
expensive labor costs for jobs such as crane or other
large machinery operators is a major need among the
heavy machinery consumer base.
Construction Demand in North America
For companies in the heavy machinery industry,
construction products sold in North America make up a
considerable amount of revenue every year. Estimates
for this area see a 5% growth in 201813 and we believe
through the demand of residential and non-building
construction that these estimate are within reason,
however we meet them with some skepticism.
Residential Construction
New residential construction in the U.S. is a large
variable in overall demand. Privately-owned housing
starts over the last 10 years have been steadily
increasing, but still have not reached pre-Financial Crisis
levels.14 Under current growth levels, those levels will
not be reached until 2022. However, today the cost to
build a home compared to 2005 is 26.2% more and
increasing at a concerning rate.13 Into 2018, our
estimates see residential construction to still grow
around 4-6%, but we have some skepticism in the years
beyond as the cost to build increases and see growth
slowing to a more conservative rate.
Non-Building Construction
Non-building construction, such as roads, bridges, and
other infrastructure have a somewhat positive outlook in
2018 and the potential for a large upside. Government
transition from the FASTLANE initiative into the
Infrastructure for Rebuilding America, or INFRA,
program has sparked the building of new highways and
the construction of multiple bridges. However, unless
considerable legislation on a proposed “Rebuild
America’s Infrastructure” plan takes place in mid-2018,
we believe reelections are pushing any large
infrastructure bill far into 2019. Assuming this,
infrastructure should only grow at moderately normal
rates, or 3-4%.
Industry Metrics
The following section shows comparable metrics within
the heavy machinery industry. Among Caterpillar,
competitors such as Cummins, Inc., Komatsu, Hitachi
Ltd., and Volvo, all manufacture and service heavy
machinery applications in a diverse set of product lines.
Gross Margin
Competitive pricing has had quite an influence on gross
margins within the industry. Typically, gross margin is a
proper gauge on the performance of a company within
its industry. A company’s ability to control its operating
costs, as well as its capability to demand a premium
from customers are key advantages within any industry.
In 2017, Caterpillar had the second highest gross margin
of its main competitors, reporting at 28%15. Just ahead is
Komatsu at 28.65%16. We believe Caterpillar is
controlling its costs well and expect it to increase their
operating margin in 2018.
Important disclosures appear on the last page of this report.
15, 16, 17, 18, 19
Operating Cash Flow/Sales Ratio
The ratio of operating cash flow to sales shows us the
capability of a company to translate value to
shareholders through day to day activities. This metric is
key to understanding the financial stability for a
machinery company. The larger the operating cash flow,
the less concern over a company’s ability to access
external financing, pay down debt, or provide dividends
to shareholders.
Caterpillar produced a 12.54%15 operating cash
flow/sales ratio in 2017, placing them near the top of
comparable firms and above the average of 11.6%.
Again, Komatsu leads the industry at around 14.21%16.
With the changes in tax rates, Caterpillar, along with the
rest of the industry, stands to improve its operating cash
flows/sales ratio in 2018 by a noticeable margin.
15, 16, 17, 18, 19
R&D Expense/Sales
Research and development (R&D) expense/sales is a
metric that demands attention. The machinery industry
has a high dependence on its ability to use future
technology to improve efficiency of its machines and
add new value. A company’s ability to effectively fund
their research and development department supports a
positive future outlook due to its ability to create
sustainable advantages.
Caterpillar has a strong, uncontested lead in R&D
funding compared to competitors with an R&D expense
to sales ratio of 11.39%. Second in our comparable
group is Volvo at 4.81%19. Based on the chart below we
can assume Caterpillar is in the best position to create
technological improvements to their product line and
establish competitive advantages through their research
and development department.
15, 16, 17, 18, 19
Porter’s Five Forces
Threat of New Entrants: Low
As a whole, barriers to entry of heavy machinery
industrials are high. The amount of capital needed to
manufacture the large pieces of machinery alone is
enough to keep many new possible entrants out. Once
the other hurdles are considered, such as various
government regulation and policy, name brand loyalty,
patents, proprietary knowledge, and the cost of
switching facilities to accommodate the manufacturing
of new products, it is easy to understand how difficult it
is to enter the industry.
Threat of Substitution: Moderate
The large companies within the industry have enough
differentiation between products so that each has diverse
offerings or unique service terms. As stated, substitution
from new entrants is unlikely due to the high capital
requirements. However, substitution from existing
competitors is still an ongoing concern for firms and
likely to persist in the future.
Power of Suppliers: Low
Supplier bargaining power is based upon material or
product scarcity, competitor demand, supplier size, and
switching costs. In the heavy machinery industry,
companies source materials from various suppliers
around the world. The likelihood of a single supplier
having the ability to pressure the large players within the
heavy machinery industry is extremely low. For every
input in the machines created by any particular supplier,
there are multiple suppliers able to provide them with
the same input.
Power of Buyers: Low
Buying power for the customers of large heavy
machinery is low due to the imbalance between
companies that sell heavy machinery and the number of
28.00%
24.92%
28.65%
25.66%
23.95%
26.24%25.66%
20.00%
22.00%
24.00%
26.00%
28.00%
30.00%
CAT CMI Komatsu Hitachi AB Volvo Average Median
Gross Margin
12.54%11.15%
14.21%
8.86%
11.23% 11.60% 11.23%
0.00%
5.00%
10.00%
15.00%
CAT CMI Komatsu Hitachi AB Volvo Average Median
Operating Cashflows/Sales
11.39%
3.68% 3.91%
1.60%
4.81% 5.08%3.91%
0.00%
5.00%
10.00%
15.00%
CAT CMI Komatsu Hitachi AB Volvo Average Median
R&D Expense/Sales
Important disclosures appear on the last page of this report.
customers. This is even more severe as we consider the
larger firms within the industry. The number of firms
that can provide large orders and produce the specific
product requested in the industry heavily disfavors
customers.
Competitive Rivalry: High
Despite the low number of competitors in the heavy
machinery industry, competition among the few
comparable firms is intense. Companies in the industry
are heavily invested in international markets. Due to this,
firms more likely find themselves having to compete
against other firms in their respect domestic markets.
Despite this disadvantage, companies can still create
competitive advantages in the industry, through supply
chain management or effective R&D.
COMPANY ANALYSIS
Company Overview
Caterpillar Inc. is a heavy machinery manufacturer
operating in three distinct sectors: construction
machinery, resource equipment, and energy and
transportation systems. Their eye-catching, signature
yellow machinery is seen around the world. Caterpillar’s
strong position in global markets has resulted in 54%15
of sales revenues coming from outside of the U.S. and
75% of their independent dealer network selling
products such as backhoe loaders, wheel dozers, and
skid steer loaders.
Business Segments
Construction Machinery
Caterpillar’s construction segment offers customers a
range of machinery in infrastructure and building
construction applications. The product line includes
backhoe loaders, small track-type tractors, mini
excavators, and many heavy industrial trucks. In 2017,
the construction segment accounted for 42% of total
revenue. Looking forward, our estimates show the
industry to continue growing through North American
construction demand and rising urbanization in
emerging markets.
Resource Machinery
The resource industries segment is responsible for
providing customers machinery applicable in mining
and quarry environments. Some of the products offered
include electric rope shovels, draglines, track and rotary
drills, and off-highway trucks. As of December 31,
2017, this segment contributed only 16.5% to total
revenues. After a relatively large reduction in recent
years, we see strong growth in this sub-sector. The
recent downturn in commodities has resulted in strong
sector consolidation. Caterpillar, now standing as the
industry leader in mining equipment, will benefit to a
significant degree as the commodity sector recovers.
Energy and Transportation Machinery
Energy and transportation machinery made by
Caterpillar is primarily focused on producing products
that serve customers in oil and gas, power generation,
marine, rail and, and industrial application. Specific
examples include reciprocating engines, generator sets,
gas turbines, diesel-electric locomotives, and other rail-
related products and their respective services. In 2017,
energy and transportation was responsible for 35.2% of
revenues for Caterpillar. Given this segment is
prioritized to the petroleum and power industries,
production is extremely sensitive to oil and gas
infrastructure and production in North America and the
Middle East.
Financial Products
Caterpillar’s financial products segment allows
customers to finance in retail and wholesale settings
through CAT Financial. Independent dealers also use
CAT Financial in order to purchase and lease
Caterpillar and other equipment. Financing plans
include operating and finance leases, installment sale
contracts, working capital loans, and wholesale
financing plans. Along with financing services, they
also provide customers with insurance to help
support purchases and lease agreements. As of 2017,
CAT Financial contributed 6.1% of total revenues. In
2018 and beyond, CAT Financial will likely see
growth simply from increased sales volume, but as
interest rates rise, it will struggle to maintain
previously low financing rates and may find it harder
to stay competitive among other financing options
available to consumers.
Caterpillar 2017 10k15
42%
16%
35%
6%
Revenue Breakdown by Industry
Construction Resouce Energy & Transportation Financial Products
Important disclosures appear on the last page of this report.
Financial Summary
Caterpillar generated $45.57B in revenue during
2017, due in part to a strong rebound in resource
equipment sales. North American growth in
construction and energy & transportation markets
drove growth in revenues. In 4Q 2017, Caterpillar
reported $12.9 billion, a YoY increase of 34.4%.20
Despite impressive sales performance in 2017,
Caterpillar struggled to turn the sales into net
income. In 2017, the company finished with a total
profit per share of $1.26. High restructuring costs,
mark-to-market losses due to remeasurement of
pension and other post-employment benefit (OPEB)
plans, and large adjustments due to the impact of
U.S. tax reform caused considerable EPS decreases.
Ignoring these adjustments, CAT reported an
adjusted profit per share of $6.88 for the year.
Looking forward, management believes 2017 sales
momentum will provide strong headwind into this
year.
Recent financial years for Caterpillar have proven to
be difficult. In the last two out of the three years, all
three industries that Caterpillar serves reported at
least an 8% decrease in total revenue15. Their
resource industry has halved revenues since 2012
due to a collapse in global commodity markets.
Fiscal year 2016 was the first time Caterpillar
reported negative earnings in over 20 years.
Despite these setbacks, Caterpillar stands to
capitalize on the rebounding commodity markets and
therefore see considerable growth in their resource
machinery industry sales. Furthermore, strong
construction demand in North America will spill
over from 2017 into the first half of 2018, bolstering
earnings for at least the first two quarters. In
conclusion, our team is optimistic about revenue
growth in 2018 and financial performance in general.
Analysis of Recent Earnings Release
Caterpillar reported its most recent earnings on
January 25, 2018, releasing performance for Q4 in
2017. Year-over-year growth was 34.4% compared
to 2016. However, given the $3.91 decrease in per
share profit due to to U.S. tax reform legislation,
Caterpillar finished their most recent quarter at a loss
per share of $2.18, a YoY decrease of 9%.
In terms of forward guidance in the report,
management notes growth based on increased
volume in end-user markets, commodity price trends
and the financial health of mining companies, and
the continuation of increased demand for equipment
used in electric power and agricultural end-user
applications and their respective services20. Our team
sees resource sales volume continuing well into
2018, led by demand in the copper, iron ore, and tin
markets. With all end-user markets looking to
continue rebounding from 2016 lows, Caterpillars
extensive order backlog and advantageous dealer
system gives the company plenty of opportunity in
2018 to outperform.
Production and Distribution
Caterpillar’s production and distribution system is an
industry leader and gives Caterpillar a strong
competitive advantage in their ability to source
materials, actively distribute products, and efficiently
service existing equipment anywhere in the world.
The commitment to globalization has allowed them
to reach emerging markets more quickly and
improve product distribution to the far ends of the
world. By building and maintaining strong
relationships with over 175 independently run
dealers in over 3,500 locations21, they reap the
benefits of both the knowledge and understanding of
local geographic needs, as well the capacity to offer
the premium and diverse product line of an
international company. This formula of local dealers
and global production has worked well to give
Caterpillar considerable market share in these areas.
Catalysts for Growth and Change
Realization of R&D Efficiencies
Caterpillar’s growth is highly dependent on its
ability to realize the performance of its research and
development into value in products and services.
Whether it be through something as simple as
creating better performing products through stronger
materials or something innovative and pushing to
new areas of growth such as creating automation
software, Caterpillar has had a history of bolstering
research and development within their company.
Their high dependence on being both the first and
the best at revolutionizing heavy industrials is
certainly a driver for growth in the company and
their industry.
Urbanization of Emerging Markets
The global trend of urbanization is a key source of
finding future growth in Caterpillar’s construction
and energy industries. Areas such as China and the
Middle East have grown and revenues for Caterpillar
in these areas shows it. In 2017, construction growth
in both regions increased revenues more than $2
billion more in revenue when compared to 2016,
Important disclosures appear on the last page of this report.
reaching a total of $9.9 billion. We believe these
regions will continue to demand a high volume of
Caterpillar products as development continues to
grow in 2018.
Rebounding Commodity Markets
Crashing commodity markets from mid-2013 into
Q2 of 2016 destroyed any demand for Caterpillar’s
resource industry products. The graph below shows
an index of global commodity prices from 2013 to
now. Given a benchmark of 2005, the index fell 98
points from 184 in Q3 of 2014 to 86 in Q2 of 2016.
Since then, we have seen a soft rebound in
commodity markets through metals such as Copper,
Aluminum, Tin, and Zinc. For Caterpillar, these
materials are key to driving resource demand growth,
especially in areas such as Latin America where
copper, tin, and zinc mining is plentiful.
Continuation of rising commodity prices from 2016
and 2017 are key to growing revenues for Caterpillar
in the coming years.
i Global Commodity Index, 2013-Today22
S.W.O.T. Analysis
Strengths
Extensive Dealer/Distribution Network
As stated previously, Caterpillar’s independent
dealers combined with a global distribution network
is the perfect combination to serve the 190 countries
they operate in. Compared to their competitors,
Caterpillar is able to expand its already large
customer base and capture market share in smaller
markets where rapid growth is possible.
Brand Recognition
Caterpillar’s brand portfolio is recognized as the
most valuable heavy equipment manufacturing brand
in the world. It gives Caterpillar a strong advantage
when entering new markets, as customers will
habitually prefer the familiar choice. Beyond the
obvious Caterpillar and CAT Financial brands, they
own other brands such as Electro-Motive, HYPAC,
CouplingAsiaTrak, and many others23.
Forward emphasis on R&D
Caterpillar’s emphasis on innovation and future
technology is a key to building future competitive
advantages within the industry. Over the past seven
years, their research and development spending has
averaged over $2.2 billion a year15, exceeding any
other mining and construction equipment competitor
on a basis of percentage of sales. Caterpillar has been
the headwind of innovation and technology
development in the heavy machinery industry and as
we look to the future, this trend will continue for
years to come.
Weaknesses
Amount of Debt Obligations
Caterpillar’s debt obligations are not to go unnoticed.
Their debt to equity ratio was 368.99 in 2017 and
total debt on their balance sheet stands just above
$36 billion. Looking at competitors, Caterpillar has
to handle a considerable proportion more in
corporate debt obligations based on sheer market
size. Knowing this, Caterpillar still holds on to a
stable A rating from the S&P for their debt. They
have a consistent track record for paying off debt
early and recently, they were able to pay off $900
million due in December of 2018.
Pension and OPEB plans
Post-employment liabilities are another ongoing
issue with Caterpillar’s financial situation. As of
December 31, 2017, Caterpillar has $8.37 billion in
underfunded pension liabilities. This is actually quite
common in the heavy manufacturing industry, as
comparable companies such as General Electric have
up $30 billion in pension liabilities to account for. As
it stands now, these underfunded pension plans do
not pose an immediate effect on Caterpillar’s
business, however future environments could cause
this to change.
Opportunities
Future of Automation
Industrial automation is currently a race between
many of the large players in the heavy machinery
industry. New applications are being tested and
applied every new iteration of products. Caterpillar
and their trend of heavy R&D spending has put them
in a favorable place to make the first moves in
innovation.
Outlook of Global Renewable Energy Markets
The global renewable energy market is robust and
growing. The industry grew at a CAGR of 9% since
2015 and is still poised to continue growing at a
Important disclosures appear on the last page of this report.
similar rate. To take advantage of this, Caterpillar
has made moves such as an alliance with First Solar
to develop photovoltaic solar solutions for micro-
grid application. They also made a deal to distribute
Cat-branded solar panels manufactured by First
Solar. In the near future, Caterpillar has the ability to
continue making advancements in the renewable
energy sector and create market share within the
industry.
Threats
Impact of Government/Fiscal Policy Change
Changes in government throughout the world happen
almost constant and the ability to keep up with
policy change in over 190 countries is justifiably
impossible. Changes in government could inhibit
future operations within a country and changes in a
countries interest rate environment would alter sales
of Caterpillar’s products. For instance, current
interest rate hikes are hindering customers’ ability to
finance machine purchases, ultimately driving
revenue lower.
Possibility of Market Correction
Caterpillar’s revenue has a high correlation with
consistent and positive economic growth. The
possibility of a market correction with greatly affect
profitability of the company and create serious
concerns over how the company would repay their
considerable amount of debt obligations.
VALUATION ANALYSIS
Valuation Summary
Our process for determining the value of a single
share of Caterpillar stock involves the application of
various pricing models, such as the Discounted Cash
Flow and Economic Profit models, the Dividend
Discount model, and a Relative Valuation model
with variables such as relative P/E and PEG ratios
based upon a select number of Caterpillar’s direct
competitors and comparable companies. In order to
use these models, we used a number of assumptions
as follows.
Key Assumptions
Revenue Decomposition
Our basis for breaking down revenue is by breaking
up each heavy machinery segment into four different
geological areas: North America, Latin America,
EAME (Europe, Africa, and the Middle East), and
Asia/Pacific regions. From there, we were able to
grow each machinery segment in each region by
various changing annual growth rates.
North America
Out of the four geographic regions, North America
has contributed the most to Caterpillar’s revenue
streams. Sales from North America make up 46.60%
of Caterpillar’s total revenue. As identified above,
construction in North America is expected to
increase by 4-6% in 2018, pushing revenue from this
area even higher. There is also opportunity for
CAT’s energy sector to benefit from increasing oil
and gas activities such as fracking. Compression
units built by Caterpillar are used for many of the gas
and oil transportation applications around the United
States. Due to these sources of demand, we see high
potential and upside to North American revenues in
future years.
Latin America
Revenue from Latin America has been the smallest
contributor to Caterpillar’s total revenue by
geological area. In 2017, only 9.13% of total sales
came from the area, due to unstable economic
conditions preventing customers from being able to
rationalize the purchasing large machinery.
However, Latin America stands to benefit greatly
from increased viability of commodity mining, such
as copper, tin and iron ore. Our estimates assume
strong double-digit growth in this region as
commodity mining reestablishes itself in the area.
Caterpillar 2017 10k15
Europe, Africa, and the Middle East
EAME saw strong sales growth in 2017 primarily
due to higher end-user demand and favorable price
realization. CAT’s resource and construction
industries saw 60% and 56% increases in fourth
46.60%
9.13%
22.64%
21.24%
Revenue by Geographic Region
North America Latin America EAME Asia/Pacifc
Important disclosures appear on the last page of this report.
quarter revenues from 2016 to 2017. We believe
improved economic stability across these regions
combined with the demand from urbanization in
emerging markets in these geographic regions will
continue growth into the coming years.
Asia/Pacific
Asia, specifically China, is creating demand through
increased building construction and infrastructure
investments. Fiscal year 2017 was an impressive
year for construction heavy machinery sales in Asia
and the Pacific, boasting a 46.5% return compared to
2016. Higher sales volume and favorable price
realization heavily offset the higher material costs. In
2018, we see sales volume remaining high until Q2.
Increasing material costs, primarily steel, will inhibit
a lot of the growth later on into 2019.
Gross Margin, Other Expenses
Caterpillar’s cost of sales has historically stayed
consistent and we see current levels of cost control
as unchanging in our forecasts. This makes sense
given that Caterpillar has remained in the heavy
machinery industry for a substantial amount of time
and cost structures have been able to reinforce
themselves. Since 2008, Caterpillar’s gross margin
has ranged from 27-30%, with a most recent upside
of 31% in 2017. Their continued commitment to
efficiency and cost control is to be expected in the
coming years. We believe a gross margin close to
30% will effectively capture this idea.
As for other expenses and their forecasts, we used a
compounded annual growth rate (CAGR) as well as
historical averaging in order to estimate. Items such
as R&D, SG&A, and other operating expenses are all
taking this approach.
Marginal Tax Rate
In December of 2017, the U.S. government passed a
bill to change the effective corporate tax rate from
35% to 21%. Before this change, we calculated
Caterpillar to have around a 28.8% marginal rate.
We estimated this rate by taking the 35% U.S.
corporate rate, subtracting 7% in deductions from
non-U.S. subsidiaries taxed at other than 35%, and
then adding .8% back in state and local U.S. taxes.
Looking forward after recent tax legislation, we see
the foreign deductions eliminated almost completely.
We estimate a 20.8% marginal 2018 rate by taking
the new 21% federal rate, subtracting only 1% now
in foreign deductions, and then adding back our
unchanged .8% in state and local tax.
Weighted Average Cost of Capital (WACC)
Our group calculated Caterpillar’s WACC to be
7.41% through a Capital Asset Pricing Model for the
cost of equity and a corporate debt proxy for the cost
of debt. We weighted these costs using a 71.35%
weight in equity and a 28.65% weight in debt given
their current market values. Our calculations are as
follows:
Cost of Equity
To derive Caterpillar’s cost of equity, we used a risk
free rate of 2.97%, an equity risk premium of 4.8%,
and a raw beta of 1.295. Our risk free rate is based
upon the current yield of a 30-year U.S. Treasury
Bond24. The market risk premium of 4.80% is the
geometric average of the market premium from 1928
to today25. Finally, our beta is an average of various
raw beta regressions through Bloomberg terminals.
After comparing multiple weekly and monthly betas
over various term lengths, we found 1.295 to be the
most appropriate measure of Caterpillar’s risk
exposure to the market. Using CAPM, we ended
with a cost of equity of 9.19%.
Cost of Debt
When calculating Caterpillar’s cost of debt, we first
found the yield to maturity on a long horizon debt
instrument that closely compared to a 30-year
Treasury Bond. Given the large amount of debt
issued by Caterpillar, we were able to find a
corporate bond maturing in 2047 with a yield to
maturity of 3.75%26. In order to capture the tax
benefits of the debt, we took this rate multiplied by 1
minus the marginal tax rate, giving us a final cost of
debt of 2.98%.
Valuation Models
Discounted Cash Flow & Economic Profit
Between each of the models used in this valuation,
we believe the Discounted Cash Flow model and the
Economic Profit model are the most accurate
estimates for the intrinsic value of Caterpillar’s
stock. Using both models, we were able to reach a
price of 164.05. A common criticism of the model is
its weight in the continuous value (CV), also known
as the terminal value. In our model we used a
conservative CV growth rate of 3.75% to limit a
chance of overvaluing Caterpillar in their continuous
state. We also used a CV return on investment
capital of 15%, which matches an average of our
forecast period. Based on the results of this model
we give Caterpillar a HOLD rating.
Important disclosures appear on the last page of this report.
Dividend Discount Model
Our team determined the dividend discount model is
not an acceptable measure of Caterpillar’s intrinsic
stock price. Using DDM, we derived a price of
92.88, which is far below what Caterpillar is valued
at today. We assume that the low price to earnings
multiple in our CV year is what is driving our
model’s output far below than what we would
expect. Given this result, we do not believe that the
dividend discount model should be used in
consideration of how to value a share of Caterpillar
common stock.
Relative Valuation Model
Similar to the Dividend Discount Model, we
determined that the Relative Valuation Model is not
a valuable measure of estimating the intrinsic value
of Caterpillar stock. We used two figures to measure
how Caterpillar would be valued as an average of its
peers. First, we used the relative price to earnings
multiple, or P/E, of Caterpillar’s peers and multiplied
it by Caterpillar’s EPS estimate for 2018 and 2019 in
order to get an implied relative value of $83.72 and
$94.38, respectively. The reasoning behind using this
model is due to the fact that many of Caterpillar’s
direct competitors and comparable peers have a
much lower P/E ratio when compared to CAT.
Looking at our 2018 industry P/E average of 14.51,
it is almost half of Caterpillar’s P/E of 26. The
second relative metric we used was the Price to
Earnings Growth (PEG) ratio. Using the PEG ratio,
we calculated CAT’s relative value to the industry
average to be $32.88 in 2018 and $36.39 in 2018.
Given the slow rate that we estimated Caterpillar to
grow their EPS by in the next 5 years, this skewed
our model heavily towards a lower price. With that
being said, we advise to ignore the results of the
Relative Valuation analysis given Caterpillar’s
abnormal P/E ratio to its industry and slow future
growth in EPS.
SENSITIVITY ANALYSIS
CV ROIC vs. CV Growth
In comparing these two metrics, our goal was to
understand the effects of our continuing value
metrics on our intrinsic value. Considering the CV of
any model can heavily determine the final price, it is
important to understand how sensitive our price is to
a change in steady state assumptions. Based on an
ROIC spread from 13-17% and a CV growth spread
from 3.35%-4.15%, we found that Caterpillar’s
intrinsic stock price could range from $146.68 to
$185.25
Gross Margin vs. SGA Expense
In comparing these two metrics, our goal was to
understand the effects of Caterpillar’s future cost
structure on its stock price. Since we project
Caterpillar to increase revenues in our forecasted
years, we also made the assumption that its Gross
Margin would increase. Given a gross margin
between 30-32% and SGA as 9.6 to 12% of total
revenue, our analysis yielded a price range of
$128.69 to $199.41.
Marginal Tax Rate vs. Cost of Debt
In comparing these two metrics, our goal was to
understand how each metric would affect our stock
price given then both influence our WACC and other
forecasted estimates. Given the change to recent tax
corporate tax rates, we may have made a mistake in
Caterpillar’s foreign tax benefit. This sensitivity
analysis will allow us to capture a range of possible
outcomes. We used cost of debt as one of our inputs
to estimate any future changes in Caterpillar’s debt
structure, such as a change in debt rating, to its stock
price. Given these variables, our analysis gave us a
price between $168.24 and $159.84.
Risk Free Rate vs. Beta
In comparing these two metrics, our goal was to
understand the effects of change in the risk-free rate
and beta as variables in our cost of equity. Given the
possibility of three to four rate hikes and its effect on
the risk-free rate, we wanted to capture a range of
different possibilities given how severe interest rates
change in our forecast. As for our beta, we made an
Important disclosures appear on the last page of this report.
assumption to average out various betas in our
valuation. In order to capture any error in our beta,
we can view this analysis to understand any changes
in perceived risk for Caterpillar. Our analysis below
yielded a price between $182.29 and $148.74.
Market Weight of Debt vs. Equity Risk Premium
In comparing these two metrics, our goal was to
understand the effects of Caterpillar’s proportion of
debt and our assumption of a 4.8% risk premium.
Changes in our equity risk premium show a large
swing in price, meaning our valuation is extremely
sensitive to our assumed risk premium. Our
sensitivity to the market weight of debt is important
to capture because as Caterpillar makes payments on
their upcoming debt and decides to take on new debt,
it effects their WACC and their intrinsic value of
stock. Our analysis found that given changes in these
variables, the intrinsic value of Caterpillar stock
could vary between $204.51 and $137.97.
Important disclosures appear on the last page of this report.
Important Disclaimer
This report was created by students enrolled in the Security
Analysis (6F:112) class at the University of Iowa. The report
was originally created to offer an internal investment
recommendation for the University of Iowa Krause Fund and
its advisory board. The report also provides potential employers
and other interested parties an example of the students’ skills,
knowledge and abilities. Members of the Krause Fund are not
registered investment advisors, brokers or officially licensed
financial professionals. The investment advice contained in this
report does not represent an offer or solicitation to buy or sell
any of the securities mentioned. Unless otherwise noted, facts
and figures included in this report are from publicly available
sources. This report is not a complete compilation of data, and
its accuracy is not guaranteed. From time to time, the University
of Iowa, its faculty, staff, students, or the Krause Fund may hold
a financial interest in the companies mentioned in this report.
Important disclosures appear on the last page of this report.
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l
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Caterpillar, Inc.Income StatementAll numbers in millions unless noted
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2024E 2025E 2026ESales and Revenues:
Sales of machinery & energy & transportation $44,147 $35,773 $42,676 $ 48,111 $ 50,804 $ 53,100 $ 54,881 $ 56,723 $ 58,695 $ 60,738 $ 62,854 $ 65,046 $ 67,317 Revenues of financial products 2,864 2,764 2,786 2966 3094 3199 3308 3423 3543 3669 3800 3938 4081
Total sales & revenues 47,011 38,537 45,565 51226 53898 56299 58189 60146 62239 64407 66654 68984 71398
Operating Costs:Cost of goods sold 30,696 25,275 28,172 33197 35055 36639 37868 39139 40500 41909 43369 44882 46449Depreciation 2,709 2,708 2,554 2682 2816 2957 3104 3260 3423 3594 3773 3962 4160Amortization 337 326 323 322 316 305 287 278 262 244 223 198 186Selling, general & administrative expenses 5,199 4,686 5,177 5532 5821 6080 6284 6496 6722 6956 7199 7450 7711Research & development expenses 2,165 1,951 1,905 2049 2156 2252 2328 2406 2490 2576 2666 2759 2856Interest expense of financial products 587 596 646 489 464 441 419 398 378 359 341 324 308Investment & interest income (expense) 65 74 122 246 258 271 284 299 314 329 346 363 381Goodwill impairment charge 0 595 0 0 0 0 0 0 0 0 0 0 0Other operating expenses (income) 2,062 1,902 2,279 1800 1500 1200 1200 1200 1200 1200 1200 1200 1200
Total operating costs 43,755 38,039 41,056 46316 48386 50145 51775 53475 55287 57168 59118 61139 63251
Operating profit 3,256$ 498$ 4,406$ 4,910$ 5,512$ 6,154$ 6,414$ 6,671$ 6,951$ 7,239$ 7,537$ 7,845$ 8,147$
Interest expense excluding financial products 507 505 531 236 224 213 203 192 183 174 165 157 149Other income (expense) 106 146 207 200 200 200 200 200 200 200 200 200 200
Consolidated profit (loss) before taxes 2,855 139 4,082 4374 4988 5641 5912 6179 6468 6765 7072 7388 7698
Provision (credit) for income taxes 742 192 3,339 905 1032 1168 1224 1279 1339 1400 1464 1529 1593Profit (loss) of consolidated companies 2,113 -53 743 3469 3955 4473 4688 4900 5129 5365 5608 5859 6105Less: profit (loss) attributable to noncontrolling interests -11 -8 -5 0 0 0 0 0 0 0 0 0 0Profit (loss) 2,102 -67 754 $3,469 $3,955 $4,473 $4,688 $4,900 $5,129 $5,365 $5,608 $5,859 $6,105
Weighted average shares outstanding-basic 594 584 592 599 603 606 610 613 616 620 621 621 621Year end shares outstanding 582 586 598 601 604 608 611 615 618 621 621 621 621Net profit (loss) per share - basic 3.54$ (0.11)$ 1.27$ $5.77 $6.54 $7.36 $7.67 $7.97 $8.30 $8.63 $9.02 $9.43 $9.82
Cash dividends declared per common share 3.01 3.08 3.11 $3.28 $3.46 $3.65 $3.85 $4.06 $4.29 $4.52 $4.77 $5.04 $5.31
Caterpillar, Inc.Balance SheetAll numbers in millions unless noted
2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2024E 2025E 2026EAssetsCurrent Assets:
Cash & short-term investments 6,460$ 7,168$ 8,260$ 10,737 13,452 16,438 19,389 22,296 25,164 27,985 30,763 33,487 36,127
Receivables - trade & other receivables 6,695 5,981 7,436 7,245 7,059 6,878 6,701 6,529 6,362 6,198 6,039 5,884 5,733 Receivables - finance 8,991 8,522 8,757 8,760 8,763 8,766 8,769 8,771 8,774 8,777 8,780 8,783 8,786 Prepaid expenses & other current assets 1,046 1,682 1,772 1,945 2,136 2,345 2,574 2,826 3,102 3,406 3,739 4,105 4,506 Raw materials 2,467 2,102 2,802 2,746 2,692 2,638 2,586 2,535 2,484 2,435 2,387 2,339 2,293 Work-in-process 1,857 1,719 2,254 2,439 2,640 2,857 3,092 3,346 3,621 3,919 4,241 4,589 4,967 Finished goods 5,122 4,576 4,761 4,851 4,943 5,036 5,132 5,229 5,328 5,428 5,531 5,636 5,742 Supplies 254 217 201 193 184 177 169 162 155 149 142 136 131 Inventories 9,700 8,614 10,018 10,166 10,316 10,468 10,622 10,779 10,938 11,099 11,263 11,429 11,598
Total current assets 34,418 31,967 36,244 38,853 41,725 44,894 48,055 51,201 54,340 57,465 60,585 63,688 66,751
Property, plant & equipment, net 16,090 15,322 14,155 14,349 14,545 14,745 14,947 15,151 15,359 15,569 15,782 15,998 16,218 Long-term receivables - trade & other 1,170 1,029 990 947 906 866 828 792 758 725 693 663 634 Long-term receivables - finance 13,651 13,556 13,542 13,464 13,387 13,310 13,233 13,157 13,081 13,006 12,931 12,857 12,783 Investments in unconsolidated affiliated companies 246 0 0 - - - - - - - - - - Non-current deferred & refundable income taxes 1,654 2,790 1,693 1,571 1,459 1,354 1,257 1,166 1,083 1,005 933 866 804 Intangible assets 2,821 2,349 2,111 1,689 1,351 1,081 865 692 553 443 354 283 227 Goodwill 6,615 6,020 6,200 6,935 7,758 8,678 9,707 10,859 12,147 13,587 15,199 17,001 19,018 Other assets 1,832 1,671 2,027 2,066 2,106 2,147 2,189 2,231 2,275 2,319 2,364 2,410 2,457
Total Assets 78,497$ 74,704$ 76,962$ 79,875 83,237 87,074 91,081 95,249 99,594 104,118 108,840 113,766 118,889
LiabilitiesCurrent Liabilities:
Short-term borrowings - financial products 6,958 7,094 4,836 4,760 4,685 4,612 4,539 4,468 4,398 4,328 4,260 4,193 4,128 Accounts payable 5,023 4,614 6,487 6,704 6,927 7,159 7,398 7,645 7,900 8,164 8,436 8,718 9,009 Accrued expenses 3,116 3,003 3,220 3,133 3,048 2,966 2,886 2,808 2,732 2,658 2,586 2,516 2,448 Accrued wages, salaries & employee benefits 1,994 1,296 2,559 2,773 3,005 3,256 3,529 3,824 4,144 4,490 4,866 5,273 5,713 Customer advances 1,146 1,167 1,193 1,133 1,076 1,022 971 922 875 831 790 750 712 Dividends payable 448 452 466 499 534 571 611 654 700 749 802 858 919 Other current liabilities 1,730 1,635 1,975 2,124 2,284 2,456 2,641 2,840 3,054 3,284 3,532 3,798 4,084 Lg-tm debt due w/in 1 yr - machinery, energy & transportation 517 507 6 4 2 1 1 1 0 0 0 0 0 Lg-tm debt due within 1 yr - financial products 5,362 6,155 6,188 6,331 6,478 6,628 6,781 6,938 7,099 7,263 7,431 7,604 7,780
Total current liabilities 26,303 26,132 26,930 27,460 28,040 28,671 29,356 30,099 30,902 31,769 32,703 33,710 34,793
Long-term debt - machinery, energy & transportation 9,004 8,436 7,929 8,219 8,520 8,833 9,156 9,491 9,839 10,200 10,573 10,960 11,362 Medium-term notes 15,713 13,869
Other long-term debt - financial products 530 513
Long-term debt - financial products 16,243 14,382 15,918 15,792 15,667 15,543 15,420 15,298 15,177 15,057 14,938 14,819 14,702 Liability for postemployment benefits 8,843 9,357 8,365 8,203 8,044 7,888 7,736 7,586 7,439 7,295 7,153 7,015 6,879 Other liabilities 3,219 3,184 4,053 4,318 4,600 4,900 5,221 5,562 5,925 6,312 6,725 7,164 7,632
Total liabilities 63,612 61,491 63,195 63,992 64,871 65,835 66,888 68,036 69,282 70,632 72,092 73,668 75,368
Shareholders' equityRedeemable noncontrolling interest - - -
Common stock 5,238 5,277 5,593 5,593 5,593 5,593 5,593 5,593 5,593 5,593 5,593 5,593 5,593 Treasury stock, at cost -17,640 -17,478 -17,005 (16,385) (15,765) (15,145) (14,525) (13,905) (13,285) (12,665) (12,045) (11,425) (10,805) Profit employed in the business 34,208 27,377 26,301 27,798 29,661 31,914 34,247 36,649 39,128 41,681 44,323 47,053 49,856 Accumulated other comprehensive income (loss) (6,997) (2,039) (1,192) (1,192) (1,192) (1,192) (1,192) (1,192) (1,192) (1,192) (1,192) (1,192) (1,192) Non-controlling interests 76 76 69 69 69 69 69 69 69 69 69 69 69
Total stockholders' equity 14,885$ 13,213$ 13,766$ 15,883$ 18,366$ 21,239$ 24,192$ 27,214$ 30,313$ 33,486$ 36,748$ 40,098$ 43,521$ Total liabilites and stockholder equity 78,497$ 74,704$ 76,961$ 79,875$ 83,237$ 87,074$ 91,081$ 95,249$ 99,594$ 104,118$ 108,840$ 113,766$ 118,889$
Caterpillar, Inc.Cash Flow StatementAll numbers in millions unless notedFiscal Years Ending Dec. 31 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Cash flow from operating activities:Profit (loss) of consolidated & affiliated companies 3,557$ 827$ 2,758$ 4,981$ 5,722$ 3,803$ 3,711$ 2,113$ (59)$ 759$ Adjustments for non-cash items:
Depreciation & amortization 1,980 2,336 2,296 2,527 2,813 3,087 3,163 3,046 3,034 2,877Actuarial loss (gain) on pension & postretirement benefits - - - - - - - - 985 301Provision (benefit) for deferred income taxes - - - - - - - - -431 1,213Goodwill impairment charge - - - - 580 - - - 595 -Other adjustments for noncash items 383 137 469 457 439 550 549 508 856 746
Changes in assets and liabilities, net of acquisitions and divertitures:Receivables - trade & other -545 4,014 -2,320 -1,345 -173 835 163 764 829 -1,151Inventories -833 2,501 -2,667 -2,927 -1,149 2,658 101 2,274 1,109 -1,295Accounts payable - -2,034 2,570 1,555 -1,868 134 222 -1,165 -200 1,478Accrued expenses - -505 117 308 183 -108 -10 -199 -201 175Accrued wages, salaries & employee benefits - - 847 619 -490 -279 901 -389 -708 1,187Customer advances 286 -646 604 173 241 -301 -593 -501 -37 -69Other assets, net -470 235 358 -91 252 -49 -300 -220 224 -192Other liabilities, net -227 -522 -23 753 -679 -71 146 444 -388 -327
Net cash flows from operating activities 4,787 6,343 5,009 7,010 5,241 10,191 8,057 6,675 5,608 5,702
Cash flow from investing activities:Capital expenditures - excluding equipment leased to others -2,445 -1,348 -1,575 -2,515 -3,350 -2,522 -1,539 -1,388 -1,109 -898Expenditures for equipment leased to others -1,566 -968 -1,011 -1,409 -1,726 -1,924 -1,840 -1,873 -1,819 -1,438Proceeds from disposal of leased assets & property, plant & equipment - - - 1,354 1,117 844 904 760 899 1,164Additions to finance receivables -14,031 -7,107 -8,498 -10,001 -12,010 -11,422 -11,278 -9,929 -9,339 -11,953Collections of finance receivables 9,717 9,288 8,987 8,874 8,995 9,567 9,841 9,247 9,369 12,018Proceeds from sale of finance receivables 949 100 16 207 132 220 177 136 127 127Investments & acquisitions, net of cash acquired -117 -19 -1,126 -8,184 -618 -195 -30 -400 -191 -59Proceeds from sale of business & investments, net of cash sold - - - 376 1,199 365 199 178 - 100Proceeds from sale of securities 357 291 228 247 306 449 810 351 694 932Investments in securities -339 -349 -217 -336 -402 -402 -825 -485 -391 -1,048Other investing activities - net 197 -128 132 -40 167 -26 -46 -114 - 61
Net cash flows from investing activities -6,296 1,002 -1,595 -11,427 -6,190 -5,046 -3,627 -3,517 -1,760 -994
Cash flow from financing activities:Dividends paid -953 -1,029 -1,084 -1,159 -1,617 -1,111 -1,620 -1,757 -1,799 -1,831Common stock issued, including treasury shares reissued 135 89 296 123 52 128 239 33 -23 566Treasury shares repurchased -1,800 - - - - -2,000 -4,238 -2,025 - -Proceeds from debt issued (original maturities greater than three months):
Machinery, Energy & Transportation 1,673 458 216 4,587 2,209 195 1,994 3 6 361Financial Products 16,257 11,833 8,108 10,873 13,806 9,133 8,655 5,129 5,109 8,702
Payments on debt (origional maturities greater than three months):Machinery, Energy & Transportation -296 -918 -1,298 -2,269 -1,107 -1,769 -785 -517 -533 -1,465Financial Products -14,143 -11,769 -11,163 -8,324 -9,992 -9,101 -8,463 -7,775 -6,032 -6,919
Short-term borrowings, net (original maturities three months or less) 2,074 -3,884 291 -43 461 -69 1,043 3,022 140 -3,058Excess tax benefit from stock-based compensation 56 21 153 189 192 96 182 24 28 -Other financing activities - - - - - - - - - -9
Net cash flows from financing activities 2,965 -5,215 -4,613 3,966 3,549 -4,511 -2,996 -3,870 -3,112 -3,653Effect of exchange rate changes on cash 158 1 -76 -84 -167 -43 -174 -169 -28 38Increase (decrease) in cash & short-term investments 1,614 2,131 -1,275 -535 2,433 591 1,260 -881 708 1,093Cash & short-term investments at beginning of period 1,122 2,736 4,867 3,592 3,057 5,490 6,081 7,341 6,460 7,168Cash & short-term investments at end of period 2,736$ 4,867$ 3,592$ 3,057$ 5,490$ 6,081$ 7,341$ 6,460$ 7,168$ 8,261$
Caterpillar, Inc.Cash Flow StatementAll numbers in millions unless noted Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2024E 2025E 2026E Cash flow from Operating activities:
Net Income 3,469 3,955 4,473 4,688 4,900 5,129 5,365 5,608 5,859 6,105 Depreciation and ammortization 3,004 3,132 3,262 3,391 3,538 3,685 3,838 3,996 4,160 4,346 Receivables - trade & other receivables 191 186 181 177 172 168 163 159 155 151 Receivables - finance (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) Prepaid expenses & other current assets (173) (190) (209) (229) (252) (276) (303) (333) (366) (402) Inventories (148) (150) (152) (154) (157) (159) (161) (164) (166) (169) Short-term borrowings - financial products (76) (75) (74) (72) (71) (70) (69) (68) (67) (66) Accounts payable 217 224 231 239 247 255 264 273 282 291 Accrued expenses (87) (85) (82) (80) (78) (76) (74) (72) (70) (68) Accrued wages, salaries & employee benefits 214 232 251 272 295 320 347 376 407 441 Customer advances (60) (57) (54) (51) (49) (46) (44) (42) (40) (38) Dividends payable 33 35 37 40 43 46 49 53 56 60 Other current liabilities 149 160 172 185 199 214 230 248 266 286 Lg-tm debt due w/in 1 yr - machinery, energy & transportation (2) (1) (1) (1) (0) (0) (0) (0) (0) (0) Lg-tm debt due within 1 yr - financial products 143 147 150 153 157 161 164 168 172 176
Net Cash flow from operating 6,869 7,509 8,183 8,555 8,941 9,346 9,765 10,198 10,646 11,112
Cash flow from Investing activities:Property, plant & equipment, net (2,876) (3,012) (3,156) (3,306) (3,464) (3,630) (3,804) (3,987) (4,178) (4,379) Long-term receivables - trade & other 43 41 40 38 36 35 33 32 30 29 Long-term receivables - finance 78 77 77 77 76 76 75 75 74 74 Investments in unconsolidated affiliated companies - - - - - - - - - - Non-current deferred & refundable income taxes 122 113 105 97 90 84 78 72 67 62 Intangible assets 100 22 (35) (71) (105) (124) (133) (134) (127) (129) Goodwill (735) (823) (920) (1,029) (1,151) (1,288) (1,441) (1,612) (1,803) (2,016) Other assets (39) (40) (41) (42) (42) (43) (44) (45) (46) (47) Net cash flow from investing (3,307) (3,622) (3,930) (4,237) (4,561) (4,891) (5,236) (5,599) (5,982) (6,407)
Cash flow from Financing activities:
Long-term debt - machinery, energy & transportation 290 301 312 324 335 348 360 374 387 401 Commercial paper - - - - - - - - - - Medium-term notes - - - - - - - - - - Other long-term debt - financial products - - - - - - - - - - Long-term debt - financial products (126) (125) (124) (123) (122) (121) (120) (119) (118) (117) Liability for postemployment benefits (162) (159) (156) (153) (150) (147) (144) (141) (139) (136) Other liabilities 265 282 301 320 341 363 387 412 439 468 Common stock - - - - - - - - - - Treasury stock, at cost 620 620 620 620 620 620 620 620 620 620 Accumulated other comprehensive income (loss) - - - - - - - - - - Non-controlling interests - - - - - - - - - - Dividend (1,972) (2,092) (2,220) (2,355) (2,498) (2,650) (2,811) (2,966) (3,129) (3,301) Net Cash provided by financing activities (1,085) (1,173) (1,267) (1,367) (1,474) (1,587) (1,708) (1,820) (1,939) (2,065)
Net Increase (Decrease) in Cash 2,477 2,715 2,986 2,951 2,906 2,868 2,821 2,779 2,724 2,640 Cash, Beginning of year 8,260 10,737 13,452 16,438 19,389 22,296 25,164 27,985 30,763 33,487 Cash, End of year 10,737 13,452 16,438 19,389 22,296 25,164 27,985 30,763 33,487 36,127
Caterpillar, Inc.Common Size Income Statement
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2024E 2025E 2026ESales and Revenues:
Sales of machinery & energy & transportation 93.91% 92.83% 93.66% 93.92% 94.26% 94.32% 94.31% 94.31% 94.31% 94.30% 94.30% 94.29% 94.28%Revenues of financial products 6.09% 7.17% 6.11% 5.79% 5.74% 5.68% 5.69% 5.69% 5.69% 5.70% 5.70% 5.71% 5.72%
Total sales & revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Operating Costs:Cost of goods sold 71.77% 73.46% 68.14% 69.00% 69.00% 69.00% 69.00% 69.00% 69.00% 69.00% 69.00% 69.00% 69.00%Selling, general & administrative expenses 11.06% 12.16% 11.36% 10.80% 10.80% 10.80% 10.80% 10.80% 10.80% 10.80% 10.80% 10.80% 10.80%Research & development expenses 4.61% 5.06% 4.18% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%Interest expense of financial products 1.25% 1.55% 1.42% 0.95% 0.86% 0.78% 0.72% 0.66% 0.61% 0.56% 0.51% 0.47% 0.43%Goodwill impairment charge 0.00% 1.54% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other operating expenses (income) 4.39% 4.94% 5.00% 3.51% 2.78% 2.13% 2.06% 2.00% 1.93% 1.86% 1.80% 1.74% 1.68%
Total operating costs 93.07% 98.71% 90.10% 90.41% 89.77% 89.07% 88.98% 88.91% 88.83% 88.76% 88.69% 88.63% 88.59%
Operating profit 6.93% 1.29% 9.67% 9.59% 10.23% 10.93% 11.02% 11.09% 11.17% 11.24% 11.31% 11.37% 11.41%
Interest expense excluding financial products 1.08% 1.31% 1.17% 0.46% 0.42% 0.38% 0.35% 0.32% 0.29% 0.27% 0.25% 0.23% 0.21%Investment & interest income 0.14% 0.19% 0.27% 0.48% 0.48% 0.48% 0.49% 0.50% 0.50% 0.51% 0.52% 0.53% 0.53%Foreign exchange gains (losses) -0.48% -0.15% -0.47% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%License fee income 0.24% 0.24% 0.22% 0.20% 0.19% 0.18% 0.17% 0.17% 0.16% 0.16% 0.15% 0.14% 0.14%Gains (losses) on sale of securities & affiliated companies 0.37% 0.12% 0.41% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Impairment of available-for-sale securities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Miscellaneous income (loss) -0.04% -0.03% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other income (expense) 0.23% 0.38% 0.45% 0.39% 0.37% 0.36% 0.34% 0.33% 0.32% 0.31% 0.30% 0.29% 0.28%Profit (loss) before taxes - U.S. 0.51% -5.33% 0.53% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Profit (loss) before taxes - Non-U.S. 5.56% 5.69% 8.43% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Consolidated profit (loss) before taxes 6.07% 0.36% 8.96% 8.54% 9.25% 10.02% 10.16% 10.27% 10.39% 10.50% 10.61% 10.71% 10.78%
Total current tax provision (credit) 2.60% 1.62% 4.67% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total deferred tax provision (credit) -1.02% -1.12% 2.66% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Provision (credit) for income taxes 1.58% 0.50% 7.33% 1.77% 1.92% 2.07% 2.10% 2.13% 2.15% 2.17% 2.20% 2.22% 2.23%Profit (loss) of consolidated companies 4.49% -0.14% 1.63% 6.77% 7.34% 7.95% 8.06% 8.15% 8.24% 8.33% 8.41% 8.49% 8.55%Equity in profit (loss) of unconsolidated affiliated companies 0.00% -0.02% 0.04% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Profit (loss) of consolidated & affiliated companies 4.49% -0.15% 1.67% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Less: profit (loss) attributable to noncontrolling interests -0.02% -0.02% -0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Profit (loss) 4.47% -0.17% 1.65% 6.77% 7.34% 7.95% 8.06% 8.15% 8.24% 8.33% 8.41% 8.49% 8.55%
Caterpillar, Inc.Common Size Balance Sheet
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2024E 2025E 2026ECash & short-term investments 13.74% 18.60% 18.13% 20.96% 24.96% 29.20% 33.32% 37.07% 40.43% 43.45% 46.15% 48.54% 50.60%Receivables - trade & other receivables 14.24% 15.52% 16.32% 14.14% 13.10% 12.22% 11.52% 10.86% 10.22% 9.62% 9.06% 8.53% 8.03%Receivables - finance 19.13% 22.11% 19.22% 17.10% 16.26% 15.57% 15.07% 14.58% 14.10% 13.63% 13.17% 12.73% 12.31%Deferred & refundable income taxes 3.25% 5.08% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Prepaid expenses & other current assets 2.23% 4.36% 3.89% 3.80% 3.96% 4.16% 4.42% 4.70% 4.98% 5.29% 5.61% 5.95% 6.31%Raw materials 5.25% 5.45% 6.15% 5.36% 4.99% 4.69% 4.44% 4.21% 3.99% 3.78% 3.58% 3.39% 3.21%Work-in-process 3.95% 4.46% 4.95% 4.76% 4.90% 5.07% 5.31% 5.56% 5.82% 6.08% 6.36% 6.65% 6.96%Finished goods 10.90% 11.87% 10.45% 9.47% 9.17% 8.95% 8.82% 8.69% 8.56% 8.43% 8.30% 8.17% 8.04%Supplies 0.54% 0.56% 0.44% 0.38% 0.34% 0.31% 0.29% 0.27% 0.25% 0.23% 0.21% 0.20% 0.18%Inventories 20.63% 22.35% 21.99% 19.84% 19.14% 18.59% 18.25% 17.92% 17.57% 17.23% 16.90% 16.57% 16.24%
Total current assets 73.21% 82.95% 79.54% 75.85% 77.42% 79.74% 82.58% 85.13% 87.31% 89.22% 90.89% 92.32% 93.49%
Property, plant & equipment, net 34.23% 39.76% 31.07% 28.01% 26.99% 26.19% 25.69% 25.19% 24.68% 24.17% 23.68% 23.19% 22.71%Long-term receivables - trade & other 2.49% 2.67% 2.17% 1.85% 1.68% 1.54% 1.42% 1.32% 1.22% 1.12% 1.04% 0.96% 0.89%Long-term receivables - finance 29.04% 35.18% 29.72% 26.28% 24.84% 23.64% 22.74% 21.87% 21.02% 20.19% 19.40% 18.64% 17.90%Investments in unconsolidated affiliated companies 0.52% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Non-current deferred & refundable income taxes 3.52% 7.24% 3.72% 3.07% 2.71% 2.40% 2.16% 1.94% 1.74% 1.56% 1.40% 1.25% 1.13%Intangible assets 6.00% 6.10% 4.63% 3.30% 2.51% 1.92% 1.49% 1.15% 0.89% 0.69% 0.53% 0.41% 0.32%Goodwill 14.07% 15.62% 13.61% 13.54% 14.39% 15.41% 16.68% 18.05% 19.52% 21.10% 22.80% 24.65% 26.64%Other assets 3.90% 4.34% 4.45% 4.03% 3.91% 3.81% 3.76% 3.71% 3.65% 3.60% 3.55% 3.49% 3.44%
Total assets 166.98% 193.85% 168.91% 155.93% 154.43% 154.66% 156.52% 158.36% 160.02% 161.66% 163.29% 164.92% 166.52%
LiabilitiesCurrent Liabilities:
Short-term borrowings - machinery & energy & transportation 0.02% 0.54% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Short-term borrowings - financial products 14.80% 18.41% 10.61% 9.29% 8.69% 8.19% 7.80% 7.43% 7.07% 6.72% 6.39% 6.08% 5.78%Accounts payable 10.68% 11.97% 14.24% 13.09% 12.85% 12.72% 12.71% 12.71% 12.69% 12.68% 12.66% 12.64% 12.62%Accrued expenses 6.63% 7.79% 7.07% 6.12% 5.66% 5.27% 4.96% 4.67% 4.39% 4.13% 3.88% 3.65% 3.43%Accrued wages, salaries & employee benefits 4.24% 3.36% 5.62% 5.41% 5.58% 5.78% 6.06% 6.36% 6.66% 6.97% 7.30% 7.64% 8.00%Customer advances 2.44% 3.03% 2.62% 2.21% 2.00% 1.82% 1.67% 1.53% 1.41% 1.29% 1.18% 1.09% 1.00%Dividends payable 0.95% 1.17% 1.02% 0.97% 0.99% 1.01% 1.05% 1.09% 1.13% 1.16% 1.20% 1.24% 1.29%Other current liabilities 3.68% 4.24% 4.33% 4.15% 4.24% 4.36% 4.54% 4.72% 4.91% 5.10% 5.30% 5.51% 5.72%Lg-tm debt due w/in 1 yr - machinery, energy & transportation 1.10% 1.32% 0.01% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Lg-tm debt due within 1 yr - financial products 11.41% 15.97% 13.58% 12.36% 12.02% 11.77% 11.65% 11.54% 11.41% 11.28% 11.15% 11.02% 10.90%
Total current liabilities 55.95% 67.81% 59.10% 53.61% 52.02% 50.93% 50.45% 50.04% 49.65% 49.32% 49.06% 48.87% 48.73%
Long-term debt - machinery, energy & transportation 19.15% 21.89% 17.40% 16.05% 15.81% 15.69% 15.74% 15.78% 15.81% 15.84% 15.86% 15.89% 15.91%Long-term debt - financial products 34.55% 37.32% 34.93% 30.83% 29.07% 27.61% 26.50% 25.43% 24.39% 23.38% 22.41% 21.48% 20.59%Liability for postemployment benefits 18.81% 24.28% 18.36% 16.01% 14.92% 14.01% 13.29% 12.61% 11.95% 11.33% 10.73% 10.17% 9.63%Other liabilities 6.85% 8.26% 8.89% 8.43% 8.53% 8.70% 8.97% 9.25% 9.52% 9.80% 10.09% 10.38% 10.69%
Total liabilities 135.31% 159.56% 138.69% 124.92% 120.36% 116.94% 114.95% 113.12% 111.32% 109.66% 108.16% 106.79% 105.56%
Shareholders' equityCommon stock 11.14% 13.69% 12.27% 10.92% 10.38% 9.93% 9.61% 9.30% 8.99% 8.68% 8.39% 8.11% 7.83%Treasury stock, at cost -37.52% -45.35% -37.32% -31.99% -29.25% -26.90% -24.96% -23.12% -21.35% -19.66% -18.07% -16.56% -15.13%Profit employed in the business 72.77% 71.04% 57.72% 54.26% 55.03% 56.69% 58.85% 60.93% 62.87% 64.72% 66.50% 68.21% 69.83%Accumulated other comprehensive income (loss) -14.88% -5.29% -2.62% -2.33% -2.21% -2.12% -2.05% -1.98% -1.92% -1.85% -1.79% -1.73% -1.67%Non-controlling interests 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total stockholders' equity 31.66% 34.29% 30.21% 31.00% 34.07% 37.73% 41.58% 45.25% 48.70% 51.99% 55.13% 58.13% 60.96%
Caterpillar, Inc. Marginal Tax Rate(2018‐) 20.70%Value Driver Estimation WACC 7%
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2024E 2025E 2026EEBITA:Operating Revenues 47011 38537 45565 51226 53898 56299 58189 60146 62239 64407 66654 68984 71398Cost of Goods Sold (COGS) 33742 28309 31049 33197 35055 36639 37868 39139 40500 41909 43369 44882 46449SG&A 5199 4686 5177 5532 5821 6080 6284 6496 6722 6956 7199 7450 7711R&D Expense 2165 1951 1905 2049 2156 2252 2328 2406 2490 2576 2666 2759 2856Depreciation and Amortization 3046 3034 2877 3004 3132 3262 3391 3538 3685 3838 3996 4160 4346Implied Interest on Operating Leases 87 74 70 75 79 79 81 80 78 77 77 78 79EBITA 2772 483 4487 7370 7656 7987 8237 8488 8765 9051 9346 9654 9958
Less Adjusted Taxes:Provision for Income Taxes 742 192 3339 905 1032 1168 1224 1279 1339 1400 1464 1529 1593+Tax Shield on Implied Lease Interest 87 74 70 75 79 79 81 80 78 77 77 78 79+Tax Shield on Interest Expense of FP 169 172 186 101 96 91 87 82 78 74 71 67 64+Tax Shield on Goodwill Impairment 0 171 0 0 0 0 0 0 0 0 0 0 0‐Tax on Interest/Investment Income 19 21 35 51 53 56 59 62 65 68 72 75 79+Tax Shield on Interest Expense of Non FP 146 145 153 49 46 44 42 40 38 36 34 32 31+Tax Shield on Other Expense 31 42 60 41 41 41 41 41 41 41 41 41 41Adjusted Taxes 1156 775 3773 1121 1242 1368 1416 1460 1509 1561 1616 1673 1729
Plus Change in Net Deffered Tax LiabilitiesDTLt ‐ DTAt ‐3180 ‐4747 ‐1693 ‐1777 ‐1847 ‐1912 ‐1964 ‐2013 ‐2059 ‐2106 ‐2151 ‐2196 ‐2237‐ DTLt‐1 ‐ DTAt‐1 ‐3143 ‐3180 ‐4747 ‐1693 ‐1777 ‐1847 ‐1912 ‐1964 ‐2013 ‐2059 ‐2106 ‐2151 ‐2196Change in Defered Taxes ‐37 ‐1567 3054 ‐84 ‐70 ‐65 ‐52 ‐50 ‐46 ‐47 ‐46 ‐45 ‐41
NOPLAT 1580 ‐1859 3768 6164 6345 6554 6769 6978 7210 7443 7685 7937 8187
Operating Current Assets:Normal Cash 328 364 207 268 336 411 485 557 629 700 769 837 903Accounts receivable 15,686 14,503 16,193 16,847 17,416 17,929 18,462 18,973 19,503 20,053 20,602 21,148 21,669Inventory 9,700 8,614 10,018 10,518 10,929 11,312 11,621 11,914 12,184 12,460 12,731 12,995 13,238PPD Expenses 1,046 1,682 1,772 1,860 1,933 2,001 2,055 2,107 2,155 2,204 2,252 2,299 2,342Operating Current Assets 26,760 25,163 28,190 29,493 30,615 31,653 32,623 33,551 34,471 35,417 36,354 37,279 38,152
Operating current liabilities:Accounts Payable 5,023 4,614 6,487 7,293 7,673 8,015 8,284 8,563 8,861 9,170 9,489 9,821 10,165Accrued Expenses 5,110 4,299 3,220 3,620 3,809 3,979 4,112 4,250 4,398 4,552 4,710 4,875 5,046Deferred revenue 1,146 1,167 1,193 1,341 1,411 1,474 1,524 1,575 1,630 1,686 1,745 1,806 1,869Operating Current Liabilites 11,279 10,080 10,900 12,254 12,893 13,468 13,920 14,388 14,889 15,407 15,945 16,502 17,080
Net Operating Working Capital 15481 15083 17290 17239 17722 18185 18703 19163 19582 20010 20409 20776 21072Plus: Net Property Plant & Equipment 16,090 15,322 14,155 14,721 15,310 15,922 16,559 17,222 17,911 18,627 19,372 20,147 20,953Plus: PV Operating Leases 839 722 688 655 624 594 566 539 514 489 466 444 423Plus: Receivables‐ Finance/Trade & Other 14821 14585 14532 15257 15854 16409 16857 17282 17674 18075 18467 18850 19203Plus: Net Intangible Assets 2821 2349 2111 2216 2303 2384 2449 2511 2567 2626 2683 2738 2790Plus: Other Assets Net 1,832 1,671 2,027 2,128 2,211 2,289 2,351 2,411 2,465 2,521 2,576 2,629 2,679Less: Other Operating Liabilities 8,843 9,357 8,365 9,404 9,895 10,336 10,683 11,042 11,426 11,824 12,237 12,664 13,108Invested Capital: 43,041 40,375 42,437 42,812 44,130 45,448 46,802 48,086 49,287 50,524 51,736 52,920 54,011
ROIC 6.04% ‐4.32% 9.33% 14.53% 14.82% 14.85% 14.89% 14.91% 14.99% 15.10% 15.21% 15.34% 15.47%FCF ‐$15,295 $807 $1,706 $5,789 $5,027 $5,236 $5,415 $5,695 $6,009 $6,206 $6,473 $6,752 $7,096EP ‐$359 ‐$5,048 $777 $3,020 $3,173 $3,284 $3,401 $3,511 $3,648 $3,791 $3,941 $4,103 $4,266
Caterpillar, Inc.Weighted Average Cost of Capital (WACC) Estimation
Cost of EquityRisk‐free Rate 2.97%Market Risk Premium 4.80%Beta 1.295Cost of Equity 9.19%
Cost of DebtPre‐tax cost of debt 3.75%Tax rate 20.7%Cost of Debt 2.98%
Cost of Preferred 0.00%
Market Value of EquityShare Price $150.23Shares Outstanding 597.63Market Value of Equity $89,781
Market Value of DebtST and Current Portion of LT $11,031Long Term $24,350PV of Oper. Leases 688Market Value of Debt $36,069
Market Weights% Equity 71.34%% Debt 28.66%
100.00%
WACC 7.41%
Caterpillar, Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs: CV Growth 3.75% CV ROIC 15.00% WACC 7.41% Cost of Equity 9.19%
Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
DCF ModelPeriod 1 2 3 4 5 6 7 8 9 10 Model Date 4/12/2018NOPLAT 6164 6345 6554 6769 6978 7210 7443 7685 7937 8187 Next FYE 12/31/2018CapEx 375 1317 1319 1354 1283 1201 1237 1212 1185 1091 Last FYE 12/31/2017Free Cash Flow (FCF) 5789 5027 5236 5415 5695 6009 6206 6473 6752 7096 Days in FY 365 Continuing Value 167,809 Days to FYE 102
Elapsed Fraction 0.279Discount Period 1 2 3 4 5 6 7 8 9 9 Adjusted Stock Price 164.05 PV of FCF 5390 4358 4225 4068 3984 3913 3763 3654 3549 88194
Value of Oper. Assets 125,097 +Value of Non‐Oper. Assets 10495‐Value of Debt 36069‐Value of Other 9,753
Value of Equity 89,770 Shares Outstanding 598Intrinsic Value 150.21
EP ModelPeriod 1 2 3 4 5 6 7 8 9 10NOPLAT 6164 6345 6554 6769 6978 7210 7443 7685 7937 8187Beg Invested Capital 42,437 42,812 44,130 45,448 46,802 48,086 49,287 50,524 51,736 52,920ROIC 14.53% 14.82% 14.85% 14.89% 14.91% 14.99% 15.10% 15.21% 15.34% 15.47%WACC 7.41% 7.41% 7.41% 7.41% 7.41% 7.41% 7.41% 7.41% 7.41% 7.41%Economic Profit (EP) 3020 3173 3284 3401 3511 3648 3791 3941 4103 4266Continuing Value 114889
Discount Period 1 2 3 4 5 6 7 8 9 9PV of Economic Profit 2811 2750 2650 2556 2456 2375 2298 2225 2157 60381
Value of EP 82660+Beg. Invested Capital 42437Value of Operating Assets 125097+Value of Non‐Oper. Assets 10495‐Value of Debt 36069‐Value of Other 9,753
Value of Equity 89,770 Shares Outstanding 598Intrinsic Value 150.21
Caterpillar, Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
EPS 5.77$ 6.54$ 7.36$ 7.67$ 7.97$ 8.30$ 8.63$ 9.02$ 9.43$ 9.82$ EPS Growth 13.39% 12.46% 4.23% 3.94% 4.11% 4.02% 4.53% 4.48% 4.19%
Key Assumptions CV growth 3.75% CV ROE 15.00% Cost of Equity 9.19%
Future Cash Flows
P/E Multiple (CV Year) 13.79EPS (CV Year) 9.82$ Dividends Per Share 3.28 3.46 3.65 3.85 4.06 4.29 4.52 4.77 5.04 5.31Discount Periods 1 2 3 4 5 6 7 8 9 9Future Stock Price 135.43$
Discounted Cash Flows 3.00 2.90 2.81 2.71 2.62 2.53 2.44 2.36 2.28 61.39
Intrinsic Value 85.05$ Current Day Adjustment 92.88$
Model Date 4/12/2018Next FYE 12/31/2018Last FYE 12/31/2017Days in FY 365 Days to FYE 102 Elapsed Fraction 0.279
Caterpillar, Inc.Relative Valuation Models
EPS EPS Est. 5yrTicker Company Price Market Cap Enterprise Value 2018E 2019E P/E 18 P/E 19 EPS gr. PEG 18 PEG 19VOLV‐B AB Volvo 155.25$ 315,445$ 405,450$ 2.49$ 2.39$ 12.00 12.60 9% 137.93 144.83 GE General Electric 13.48$ 117,054$ 234,810$ $ 0.96 $ 1.06 14.04 12.72 10% 135.02 122.28 DE John Deere & Co. 155.32$ 50,291$ 87,190$ $ 9.46 $ 11.43 16.42 13.59 26% 62.83 52.00 KMTUY Komatsu Ltd. 33.69$ 32,100$ 38,330$ $ 2.25 $ 1.49 15.00 22.60 32% 47.32 71.29 CMI Cummins, Inc. 162.09$ 26,676$ 26,470$ $ 12.64 $ 13.41 12.82 12.09 11% 119.96 113.07 CNHI CNH Industrial N.V. 12.40$ 16,909$ 37,800$ $ 0.67 $ 0.82 18.51 15.12 30% 62.74 51.26 GNRC Generac Power Systems 45.91$ 2,861$ 3,710$ $ 3.60 $ 3.75 12.75 12.24 8% 159.41 153.03
Average 14.51 14.42 103.60 101.11
CAT Caterpillar, Inc. $150.23 $88,078 $121,000 $5.77 $6.54 26.0 23.0 5.5% 473.3 417.4
Implied Relative Value: P/E (EPS18) $ 83.72 P/E (EPS19) 94.38$ PEG (EPS18) 32.88$ PEG (EPS19) 36.39$
Caterpillar, Inc.Key Management Ratios
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2024E 2025E 2026E
Liquidity RatiosCash Ratio (Cash & Cash Equivalents/Current Liabilities) 0.25 0.27 0.31 0.39 0.48 0.57 0.66 0.74 0.81 0.88 0.94 0.99 1.04Current Ratio (Current Assets/Current Liabilities) 1.31 1.22 1.35 1.41 1.49 1.57 1.64 1.70 1.76 1.81 1.85 1.89 1.92Quick Ratio (Current Assets ‐ Inventories)/Current Liabilities) 0.84 0.83 0.91 0.97 1.04 1.12 1.19 1.25 1.30 1.35 1.39 1.43 1.46
Activity or Asset‐Management RatiosTotal Asset Turnover Ratio (Total Revenue/Average Total Assets) 1.17 1.01 1.15 1.25 1.26 1.26 1.25 1.23 1.22 1.21 1.20 1.19 1.18Inventory Turnover Ratio (COGS/Average Inventory) 2.80 2.76 3.02 3.29 3.42 3.53 3.59 3.66 3.73 3.80 3.88 3.96 4.03Receivable Turnover (Total Revenue/ Accounts Receivable) 2.80 2.46 3.14 3.16 3.37 3.56 3.72 3.89 4.07 4.26 4.45 4.65 4.87
Financial Leverage RatiosDebt to Equity Ratio (Total Debt/Total Shareholders Equity) 364.98 385.65 368.99 221.04 192.49 167.69 148.38 133.01 120.45 110.04 101.24 93.71 87.25Debt Ratio (Total Debt/Total Assets) 69.21 68.21 66.00 43.95 42.47 40.90 39.41 38.00 36.66 35.39 34.18 33.03 31.94Long Term Debt to Equity Ratio (LT Debt/ Total Shareholders Equity) 278.74 281.54 288.86 151.18 131.70 114.77 101.59 91.09 82.53 75.42 69.42 64.29 59.89
Profitability RatiosReturn or Assets (Net income/ Total Assets) 2.58% ‐0.09% 0.99% 4.42% 4.85% 5.25% 5.26% 5.26% 5.27% 5.27% 5.27% 5.26% 5.25%Gross Margin (COGS/Totale Revenue) 30.47% 29.35% 33.99% 31.00% 31.00% 31.00% 31.00% 31.00% 31.00% 31.00% 31.00% 31.00% 31.00%Operating Margin (Operating Income/Total Revenue) 6.93% 1.29% 9.67% 9.59% 10.23% 10.93% 11.02% 11.09% 11.17% 11.24% 11.31% 11.37% 11.41%
Payout Policy RatiosDividend Payout Ratio (Dividends per Share/EPS) 85.03% ‐2800.00% 244.88% 56.85% 52.90% 49.62% 50.23% 50.99% 51.67% 52.40% 52.89% 53.41% 54.08%Retention Ratio (EPS/Dividends per Share) 14.97% 2900.00% ‐144.88% 43.15% 47.10% 50.38% 49.77% 49.01% 48.33% 47.60% 47.11% 46.59% 45.92%
Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)
Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Leases2018 211 2017 211 2016 2372019 142 2018 160 2017 1832020 104 2019 107 2018 1402021 74 2020 81 2019 932022 58 2021 61 2020 68Thereafter 169 Thereafter 176 Thereafter 205Total Minimum Payments 758 Total Minimum Payments 796 Total Minimum Payments 926Less: Interest 70 Less: Interest 74 Less: Interest 87PV of Minimum Payments 688 PV of Minimum Payments 722 PV of Minimum Payments 839
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre‐Tax Cost of Debt 2.98% Pre‐Tax Cost of Debt 2.98% Pre‐Tax Cost of Debt 2.98%Number Years Implied by Year 6 Payment 2.9 Number Years Implied by Year 6 Payment 2.9 Number Years Implied by Year 6 Payment 3.0
Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 211 204.9 1 211 204.9 1 237 230.12 142 133.9 2 160 150.9 2 183 172.63 104 95.2 3 107 98.0 3 140 128.24 74 65.8 4 81 72.0 4 93 82.75 58 50.1 5 61 52.7 5 68 58.76 & beyond 58 137.8 6 & beyond 61 143.6 6 & beyond 68 167.0PV of Minimum Payments 687.8 PV of Minimum Payments 722.1 PV of Minimum Payments 839.3
Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)
Operating Operating OperatingFiscal Years Ending Leases Fiscal Years Ending 152.544828637025 Leases Fiscal Years Ending 166.058897319016 Leases2015 229 2014 244 2013 2542016 174 2015 180 2014 1932017 125 2016 133 2015 1392018 92 2017 99 2016 1042019 65 2018 74 2017 74Thereafter 189 Thereafter 229 Thereafter 239Total Minimum Payments 874 Total Minimum Payments 959 Total Minimum Payments 1003Less: Interest 81 Less: Interest 92 Less: Interest 97PV of Minimum Payments 793 PV of Minimum Payments 867 PV of Minimum Payments 906
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre‐Tax Cost of Debt 2.98% Pre‐Tax Cost of Debt 2.98% Pre‐Tax Cost of Debt 2.98%Number Years Implied by Year 6 Payment 2.9 Number Years Implied by Year 6 Payment 3.1 Number Years Implied by Year 6 Payment 3.2
Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 229 222.4 1 244 236.9 1 254 246.72 174 164.1 2 180 169.7 2 193 182.03 125 114.5 3 133 121.8 3 139 127.34 92 81.8 4 99 88.0 4 104 92.55 65 56.1 5 74 63.9 5 74 63.96 & beyond 65 154.2 6 & beyond 74 186.3 6 & beyond 74 194.0PV of Minimum Payments 793.1 PV of Minimum Payments 866.7 PV of Minimum Payments 906.4
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol CATCurrent Stock Price $150.23Risk Free Rate 2.97%Current Dividend Yield 2.06%Annualized St. Dev. of Stock Returns 23.03%
Average Average B‐S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price Granted$22.17 ‐ 57.85 1,562,670 50.47 1.96 96.67$ 151,070,997$ $73.20 ‐ 74.77 3,577,767 74.74 8.02 71.64$ 256,307,378$ $83.00 5,266,798 83.00 7.17 66.61$ 350,826,020$ $89.75 ‐ 96.31 7,912,539 94.17 6.88 59.79$ 473,055,928$ $102.13 ‐ 110.09 3,180,121 106.55 3.74 49.33$ 156,880,867$ Total 21,499,895 86.86$ 6.32 80.77$ 1,388,141,190$
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 21,499,895Average Time to Maturity (years): 6.32Expected Annual Number of Options Exercised: 3,402,582
Current Average Strike Price: 86.86$ Cost of Equity: 9.00%Current Stock Price: $150.23
2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027EIncrease in Shares Outstanding: 3,402,582 3,402,582 3,402,582 3,402,582 3,402,582 3,402,582 3,402,582Average Strike Price: 86.86$ 86.86$ 86.86$ 86.86$ 86.86$ 86.86$ 86.86$ 86.86$ 86.86$ 86.86$ Increase in Common Stock Account: 295,532,337 295,532,337 295,532,337 295,532,337 295,532,337 295,532,337 295,532,337 ‐ ‐ ‐
Change in Treasury Stock 510,150 494,846 480,000 465,600 451,632 438,083 424,941 412,192 399,827 387,832Expected Price of Repurchased Shares: 150.23$ 163.75$ 178.49$ 194.55$ 212.06$ 231.15$ 251.95$ 274.63$ 299.34$ 326.28$ Number of Shares Repurchased: 3,396 3,022 2,689 2,393 2,130 1,895 1,687 1,501 1,336 1,189
Shares Outstanding (beginning of the year) 597,626,000 601,025,186 604,424,746 607,824,639 611,224,828 614,625,280 618,025,967 621,426,862 621,425,361 621,424,026Plus: Shares Issued Through ESOP 3,402,582 3,402,582 3,402,582 3,402,582 3,402,582 3,402,582 3,402,582 0 0 0Less: Shares Repurchased in Treasury 3,396 3,022 2,689 2,393 2,130 1,895 1,687 1,501 1,336 1,189 Shares Outstanding (end of the year) 601,025,186 604,424,746 607,824,639 611,224,828 614,625,280 618,025,967 621,426,862 621,425,361 621,424,026 621,422,837