Krause Fund Research Spring 2018
Industrials Caterpillar Inc. (NYSE. CAT)
Recommendation: HOLD April 17, 2018
Analysts Current Price $152.14 Daniel Rosenberger [email protected] Target Price $160-165 Charlie Lynch [email protected] Key Investment Highlights Steve Diaz [email protected] • Increasing order volume – Carrying over from 2018, Delun Pan Caterpillar is looking to continue to capitalize on [email protected] increased order volume and a favorable economic setting. Strong GDP growth as well as considerable Company Overview order backlog will continue the creating of new heavy Caterpillar Inc. is a heavy machinery manufacturer industrial machines. operating around the world in three distinct sectors: • Commodity markets rebounding – Following construction machinery, resource equipment, and energy commodity markets crashing in 2016, Caterpillar is and transportation systems. Its signature bright-yellow capable of refilling demand as commodity prices machines have become a staple in construction sites and continue to rise in 2018. Latin American mining many industrial applications. Its independent dealer operations are expected to increase substantially. network and global supply chain allows for Caterpillar to • Construction Growth in 2018 – North American operate in over 190 countries in 3,500 locations, creating construction growth is set to increase another 4-6% in over $45B in total revenues in 2017. 2018, based on increased demand in single-family home construction and increased infrastructure Stock Performance Highlights funding. 52 Week High 173.24 • Limited Access to Capital Markets – Looking at the 52 Week Low 92.98 future interest rate environment and a flattening yield Beta Value 1.49 curve, demand for Caterpillar products is set to Average Daily Volume 6,206,627 decrease as it becomes more expense for customers to finance the purchase of expensive, large machinery. Share Highlights • Innovation within the Industry – Market share in the Market Capitalization 91.861 B heavy machinery industry in extremely tight and the Shares Outstanding 596 M ability to create competitive advantages through Enterprise Value 118.42 B research and development, such as automation and EPS (FY 2017) $1.27 remote operation capabilities are key to controlling Forward P/E Ratio 26.0 future market share. Dividend Yield 2.06% Dividend Payout Ratio 56.85% One Year Stock Performance
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% source: CNBC
Important disclosures appear on the last page of this report.
ECONOMIC ANALYSIS Global Real GDP
We believe that the GDP will continue to grow and will GDP (Strength in the Economy) reach a growth range of 3.3%-3.7%. We are expecting
the new tax bill to raise GDP with an increase in GDP is used as a relatively strong indicator of the consumer spending and stronger business investments. Industrial sector due to its sensitivity to the industry. We are also expecting manufacturers to benefit from With the large investments that we see in the sector, stronger exports as the global economy continues to clients are prone to purchase these goods while GDP is strengthen in the future. Because a large part of increasing. As the chart below reflects, the industrials Caterpillar’s revenues comes from overseas sales sector has had a steady growth over the past three years, (roughly 54%), it is important that we recognize the from approximately $487 in April of 2014 to $615 as of Global GDP and factor this into our forecasts. The April 2018. The lighter blue line represents the global real GDP growth rate is currently sitting at 3.7%, Industrial sector, while the dark blue represents the S&P with a general consensus that this rate will not change 500. The similarity between the S&P 500 and the drastically within the next year staying consistent at Industrials sector indicates a high degree of correlation, 3.7%. and helps analysts predict, on a more specific time line, the adjustments that will be seen by the Industrial Interest Rates sectors.
Interest rates today are extremely important to the S&P 500 Industrials Growth (3 yr.) 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
S&P Dow Jones Indices1 rates continue to grow, companies will not borrow as much capital to invest in their projects and we could GDP Estimates within 6 Months quite possibly see a decrease in Industrial The fourth quarter 2017 GDP beat estimates and came in manufacturing, which in turn could lower GDP. at 2.9% after ending 2016 at 1.8%. This GDP growth fully explains the increase in the stock market as we saw Historical 10-yr Treasury Rates 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.
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 Trading Economics2 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 are also expecting GDP to rise with the increase in goods $107.34 per US Dollar and the Euro is trading at $0.81 and services being produced. per US Dollar. Generally, when companies are generating revenues over seas, they will keep the INDUSTRY ANALYSIS revenue in the respective companies.
Industry Overview Tax Rates
The industrial machinery sector holds a large spectrum This year marks a big year in economic history with the of sub-industries. Caterpillar operates under the heavy new tax bill that was introduced by President Trump’s machinery sector. For our purposes we will be analyzing administration. This bill decreased the top corporate tax three specific sub-industries within the sector: rates from the 35% rate we have had since 1986 and construction machinery, mining and resource equipment, decreased this rate to 21%. Following the decrease in the and energy and transportation machinery. However, tax rate, we expect an increase in foreign tax benefits these sub-industries tend to have similar characteristics that we receive from -6.4% to about -1%. This is due to when considering key drivers, trends and environments. the United States having a tax rate that is more in line Companies within these sub-sectors, including with a majority of other countries we trade with. We Caterpillar, are extremely sensitive to the global anticipate seeing a decrease in the amount of deferred economy and its health largely due to their global taxes that companies keep on their balance sheets positioning and historical correlation with markets. In moving forward. With this new tax rate, we will see order to sell their products effectively, companies use higher net income reported for companies and increase independent dealers to distribute and sell their products. their balance sheet. Lastly, due to consolidation, many of these companies
have a large presence in many different sub-industries Unemployment and therefore may be difficult to compare.
Unemployment is at an all-time low of 4.1% since 2001, Key Industry Drivers and has been at this level since October 2017. With
unemployment so low, this can cause some issues in GDP Growth terms of labor costs for companies. With unemployment Heavy machinery has a high dependency on stable staying low, the ability to find new employees decreases market conditions. Consistent growth levels and a stable which means labor costs will increase in order to attract economic environment, including consistent GDP new workers. As labor costs increase, companies will growth, increases product demand because consumers need to increase their product prices to cover the can more accurately predict if they will be able to increase in labor. We already see a small increase in commit to large capital expenditures. For example, total hourly earnings from the past quarter, increasing from industrial production has closely tracked real GDP in 2.6% to 2.7%. recent years and we can expect this trend to continue looking forward.
Real GDP vs Total Industrials Prod. 10.0 5.0 0.0
Percent Percent Change -5.0 U3 Unemployment Rate 2014 - Today 2010 2011 2012 2013 2014 2015 2016 2017 4 Trading Economics Real GDP Total Industrials Production
We are expecting a small increase in unemployment 5,6 over the next year to 4.4%. We expect the number of St. Louis INDPRO and GDPC1 Indexes Commodity Prices people in the work force to increase with people who are Companies in the sector are highly sensitive to changes currently not in the work force but who see the stagnant in certain commodity prices, specifically steel. rate and are drawn back to the work force. As the Commodity prices are relatively stable through recent number of people within the work force increases, we times, however with recent import tariff plans by
Important disclosures appear on the last page of this report.
President Trump, we see large changes in steel prices production, employment, supplier deliveries, and within the next year. As of this report, there is an inventories. A measurement over 50 indicates improving announced 25% tariff on steel and a 10% tariff on conditions. aluminum imports, which would result in an anywhere from a 6-20% decrease in EPS estimates for companies ISM Purchasing Managers Index in the industrial machinery sector, according to analysts at J.P. Morgan7. However, from our perspective, we see 65 60 the 25% tariff as a worst case scenario and recommend 55 that these tariffs be met with a high level of skepticism 50 until future advancements in tariff talks are made. 45 40
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Mar-16 Mar-17 Mar-18 May-17 May-16 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 Hot-rolled Coil Steel from 2011 – Today8 deliveries will remain high as orders are fulfilled.
Within the next year, we see steel prices continuing to New Orders increase but at a slower rate. This will inhibit growth New orders are a key statistic to understanding the within the industry in the short term, however if the current demand environment. The Durable Goods report recent easing of trade war talks is any sign, we could see for Manufacturers’ is a figure used to see new orders in this recent run up in prices reverse. the last month. In 2018, we have seen strong increases in new orders with a 7.4% increase in new, nondefense Capital Spending capital goods orders.10 Sales volume in the industrials sector is heavily reliant on capital expenditures. Customers, both individuals and Order Backlog corporations, rely on favorable capital markets in order Order backlog is an indicator for expected future to make heavy machinery purchases. Recent years have revenues. It is the accumulation of unshipped orders. In been a great environment for capital spending. With 2018, we’ve seen a strong trend of increasing backlog equity markets at all-time highs and interest rates at among manufacturing firms. Based on the Institute for extreme lows, we saw many companies take advantage Supply Management’s Backlog Index, March and and capital spending flourish. Looking ahead, with fed February registered 59.8% (50% indicates normal).11 rate hikes scheduled to take place, upward pressure on interest rates is causing a final boost in capital spending Date % Higher % Same % Lower Index levels. We see this cycle in capital expenditure growth coming to an end in 2018 and expect a decrease in later Mar-18 32.1 55.4 12.5 59.8 years as the effects of increasing interest rates reduce capital spending. Feb-18 31.8 56 12.2 59.8
Industry Trends Jan-18 27.8 56.8 15.4 56.2 Dec-17 25.6 58.6 15.9 54.9 Increased Order Volume Order volume within the industry has increased Order Backlog Index from ISM11 dramatically in 2018 and will serve as strong support for continued revenue growth in the upcoming year. On average, 30 percent of manufacturing firms reported higher order backlogs. Caterpillar, for example, reported Purchasing Managers Index (PMI) a $3.9 billion increase in order backlog for the 2017. We The PMI index is a monthly measure of five seasonally see these increases in backlog as an effect of the current adjusted diffusion indexes. Each measure is evenly stable economic environment. As noted before, the weighted; the PMI is comprised of new orders, capital spending trend in the last 12 months has pushed
Important disclosures appear on the last page of this report. order volume and created a healthy amount of order through the demand of residential and non-building backlog for the coming year and even further into 2019. construction that these estimate are within reason, however we meet them with some skepticism. Competitive Environment The heavy machinery industry as a whole is moderately Residential Construction fragmented. We see competition in this sector vary New residential construction in the U.S. is a large heavily between companies depending on geography and variable in overall demand. Privately-owned housing even individual orders. Therefore, comparing companies starts over the last 10 years have been steadily can become quite difficult when they may compete in increasing, but still have not reached pre-Financial Crisis complete different areas of the world. As with any levels.14 Under current growth levels, those levels will industry, price competition is to be expected, however, not be reached until 2022. However, today the cost to the machinery industry also competes based on the depth build a home compared to 2005 is 26.2% more and of their product offerings, such as their ability to fulfill increasing at a concerning rate.13 Into 2018, our the customer’s wants and their compatibility with the estimates see residential construction to still grow customer’s facilities or needs. When considering larger around 4-6%, but we have some skepticism in the years sales to other companies or governments, product beyond as the cost to build increases and see growth compatibility is the key determinant in whose product slowing to a more conservative rate. gets bought. Companies that can adapt their products or diversify their product line in order to fit multiple Non-Building Construction customer’s pre-existing factory footprints have a large Non-building construction, such as roads, bridges, and competitive advantage over others. other infrastructure have a somewhat positive outlook in 2018 and the potential for a large upside. Government Industrial Automation transition from the FASTLANE initiative into the Research and development in the heavy machinery Infrastructure for Rebuilding America, or INFRA, sector has had a specific focus to create and improve program has sparked the building of new highways and automation within the construction and mining the construction of multiple bridges. However, unless industries. Companies advance the idea that the considerable legislation on a proposed “Rebuild automation of processes will reduce labor costs, improve America’s Infrastructure” plan takes place in mid-2018, consistency in product quality, reduce waste, and make we believe reelections are pushing any large available real-time feedback and diagnostics for infrastructure bill far into 2019. Assuming this, increased job efficiency. infrastructure should only grow at moderately normal rates, or 3-4%. Currently, the industry’s level of automation is constricted. Applications involving autonomous use are Industry Metrics limited to repetitive tasks and the types of technology The following section shows comparable metrics within used are similar to that of self-driving vehicles, such as the heavy machinery industry. Among Caterpillar, GPS and a mix of RADAR and LiDAR sensors.12 The competitors such as Cummins, Inc., Komatsu, Hitachi mining industry is one of the biggest benefiters of such Ltd., and Volvo, all manufacture and service heavy technology. Bulldozing, hauling materials, and remote machinery applications in a diverse set of product lines. operation in underground environments are key examples of modern-day applications. Gross Margin Competitive pricing has had quite an influence on gross In the future, we see automation as a major competitive margins within the industry. Typically, gross margin is a advantage in the industry. The benefits of eliminating proper gauge on the performance of a company within human error for customers and at the same time reducing its industry. A company’s ability to control its operating expensive labor costs for jobs such as crane or other costs, as well as its capability to demand a premium large machinery operators is a major need among the from customers are key advantages within any industry. heavy machinery consumer base. In 2017, Caterpillar had the second highest gross margin Construction Demand in North America of its main competitors, reporting at 28%15. Just ahead is For companies in the heavy machinery industry, Komatsu at 28.65%16. We believe Caterpillar is construction products sold in North America make up a controlling its costs well and expect it to increase their considerable amount of revenue every year. Estimates operating margin in 2018. for this area see a 5% growth in 201813 and we believe
Important disclosures appear on the last page of this report.
can assume Caterpillar is in the best position to create Gross Margin technological improvements to their product line and 30.00% 28.65% establish competitive advantages through their research 28.00% 28.00% and development department. 26.24% 25.66% 25.66% 26.00% 24.92% 23.95% R&D Expense/Sales 24.00% 15.00% 22.00% 11.39% 20.00% 10.00% CAT CMI Komatsu Hitachi AB Volvo Average Median 4.81% 5.08% 3.68% 3.91% 3.91% 15, 16, 17, 18, 19 5.00% 1.60%
Operating Cash Flow/Sales Ratio 0.00% CAT CMI Komatsu Hitachi AB Volvo Average Median The ratio of operating cash flow to sales shows us the 15, 16, 17, 18, 19 capability of a company to translate value to shareholders through day to day activities. This metric is Porter’s Five Forces key to understanding the financial stability for a machinery company. The larger the operating cash flow, Threat of New Entrants: Low the less concern over a company’s ability to access As a whole, barriers to entry of heavy machinery external financing, pay down debt, or provide dividends industrials are high. The amount of capital needed to to shareholders. manufacture the large pieces of machinery alone is enough to keep many new possible entrants out. Once 15 Caterpillar produced a 12.54% operating cash the other hurdles are considered, such as various flow/sales ratio in 2017, placing them near the top of government regulation and policy, name brand loyalty, comparable firms and above the average of 11.6%. patents, proprietary knowledge, and the cost of 16 Again, Komatsu leads the industry at around 14.21% . switching facilities to accommodate the manufacturing With the changes in tax rates, Caterpillar, along with the of new products, it is easy to understand how difficult it rest of the industry, stands to improve its operating cash is to enter the industry. flows/sales ratio in 2018 by a noticeable margin. Threat of Substitution: Moderate Operating Cashflows/Sales The large companies within the industry have enough 14.21% 15.00% 12.54% differentiation between products so that each has diverse 11.60% 11.15% 11.23% 11.23% offerings or unique service terms. As stated, substitution 8.86% 10.00% from new entrants is unlikely due to the high capital requirements. However, substitution from existing 5.00% competitors is still an ongoing concern for firms and likely to persist in the future. 0.00% CAT CMI Komatsu Hitachi AB Volvo Average Median 15, 16, 17, 18, 19 Power of Suppliers: Low Supplier bargaining power is based upon material or R&D Expense/Sales product scarcity, competitor demand, supplier size, and Research and development (R&D) expense/sales is a switching costs. In the heavy machinery industry, metric that demands attention. The machinery industry companies source materials from various suppliers has a high dependence on its ability to use future around the world. The likelihood of a single supplier technology to improve efficiency of its machines and having the ability to pressure the large players within the add new value. A company’s ability to effectively fund heavy machinery industry is extremely low. For every their research and development department supports a input in the machines created by any particular supplier, positive future outlook due to its ability to create there are multiple suppliers able to provide them with sustainable advantages. the same input.
Caterpillar has a strong, uncontested lead in R&D Power of Buyers: Low funding compared to competitors with an R&D expense Buying power for the customers of large heavy to sales ratio of 11.39%. Second in our comparable machinery is low due to the imbalance between group is Volvo at 4.81%19. Based on the chart below we companies that sell heavy machinery and the number of Important disclosures appear on the last page of this report. customers. This is even more severe as we consider the recent downturn in commodities has resulted in strong larger firms within the industry. The number of firms sector consolidation. Caterpillar, now standing as the that can provide large orders and produce the specific industry leader in mining equipment, will benefit to a product requested in the industry heavily disfavors significant degree as the commodity sector recovers. customers. Energy and Transportation Machinery Competitive Rivalry: High Energy and transportation machinery made by Despite the low number of competitors in the heavy Caterpillar is primarily focused on producing products machinery industry, competition among the few that serve customers in oil and gas, power generation, comparable firms is intense. Companies in the industry marine, rail and, and industrial application. Specific are heavily invested in international markets. Due to this, examples include reciprocating engines, generator sets, firms more likely find themselves having to compete gas turbines, diesel-electric locomotives, and other rail- against other firms in their respect domestic markets. related products and their respective services. In 2017, Despite this disadvantage, companies can still create energy and transportation was responsible for 35.2% of competitive advantages in the industry, through supply revenues for Caterpillar. Given this segment is chain management or effective R&D. prioritized to the petroleum and power industries, production is extremely sensitive to oil and gas COMPANY ANALYSIS infrastructure and production in North America and the Middle East. Company Overview Caterpillar Inc. is a heavy machinery manufacturer Financial Products operating in three distinct sectors: construction Caterpillar’s financial products segment allows machinery, resource equipment, and energy and customers to finance in retail and wholesale settings transportation systems. Their eye-catching, signature through CAT Financial. Independent dealers also use yellow machinery is seen around the world. Caterpillar’s CAT Financial in order to purchase and lease strong position in global markets has resulted in 54%15 Caterpillar and other equipment. Financing plans of sales revenues coming from outside of the U.S. and include operating and finance leases, installment sale 75% of their independent dealer network selling contracts, working capital loans, and wholesale products such as backhoe loaders, wheel dozers, and financing plans. Along with financing services, they skid steer loaders. also provide customers with insurance to help support purchases and lease agreements. As of 2017, Business Segments CAT Financial contributed 6.1% of total revenues. In 2018 and beyond, CAT Financial will likely see Construction Machinery growth simply from increased sales volume, but as Caterpillar’s construction segment offers customers a interest rates rise, it will struggle to maintain range of machinery in infrastructure and building previously low financing rates and may find it harder construction applications. The product line includes to stay competitive among other financing options backhoe loaders, small track-type tractors, mini available to consumers. excavators, and many heavy industrial trucks. In 2017, the construction segment accounted for 42% of total Revenue Breakdown by Industry revenue. Looking forward, our estimates show the industry to continue growing through North American 6% construction demand and rising urbanization in emerging markets. 42% Resource Machinery 35% 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, 16% 2017, this segment contributed only 16.5% to total Construction Resouce Energy & Transportation Financial Products revenues. After a relatively large reduction in recent years, we see strong growth in this sub-sector. The Caterpillar 2017 10k15
Important disclosures appear on the last page of this report.
Financial Summary used in electric power and agricultural end-user Caterpillar generated $45.57B in revenue during applications and their respective services20. Our team 2017, due in part to a strong rebound in resource sees resource sales volume continuing well into equipment sales. North American growth in 2018, led by demand in the copper, iron ore, and tin construction and energy & transportation markets markets. With all end-user markets looking to drove growth in revenues. In 4Q 2017, Caterpillar continue rebounding from 2016 lows, Caterpillars reported $12.9 billion, a YoY increase of 34.4%.20 extensive order backlog and advantageous dealer Despite impressive sales performance in 2017, system gives the company plenty of opportunity in Caterpillar struggled to turn the sales into net 2018 to outperform. income. In 2017, the company finished with a total profit per share of $1.26. High restructuring costs, Production and Distribution mark-to-market losses due to remeasurement of Caterpillar’s production and distribution system is an pension and other post-employment benefit (OPEB) industry leader and gives Caterpillar a strong plans, and large adjustments due to the impact of competitive advantage in their ability to source U.S. tax reform caused considerable EPS decreases. materials, actively distribute products, and efficiently Ignoring these adjustments, CAT reported an service existing equipment anywhere in the world. adjusted profit per share of $6.88 for the year. The commitment to globalization has allowed them Looking forward, management believes 2017 sales to reach emerging markets more quickly and momentum will provide strong headwind into this improve product distribution to the far ends of the year. world. By building and maintaining strong relationships with over 175 independently run Recent financial years for Caterpillar have proven to dealers in over 3,500 locations21, they reap the be difficult. In the last two out of the three years, all benefits of both the knowledge and understanding of three industries that Caterpillar serves reported at local geographic needs, as well the capacity to offer least an 8% decrease in total revenue15. Their the premium and diverse product line of an resource industry has halved revenues since 2012 international company. This formula of local dealers due to a collapse in global commodity markets. and global production has worked well to give Fiscal year 2016 was the first time Caterpillar Caterpillar considerable market share in these areas. reported negative earnings in over 20 years. Catalysts for Growth and Change Despite these setbacks, Caterpillar stands to capitalize on the rebounding commodity markets and Realization of R&D Efficiencies therefore see considerable growth in their resource Caterpillar’s growth is highly dependent on its machinery industry sales. Furthermore, strong ability to realize the performance of its research and construction demand in North America will spill development into value in products and services. over from 2017 into the first half of 2018, bolstering Whether it be through something as simple as earnings for at least the first two quarters. In creating better performing products through stronger conclusion, our team is optimistic about revenue materials or something innovative and pushing to growth in 2018 and financial performance in general. new areas of growth such as creating automation software, Caterpillar has had a history of bolstering Analysis of Recent Earnings Release research and development within their company. Caterpillar reported its most recent earnings on Their high dependence on being both the first and January 25, 2018, releasing performance for Q4 in the best at revolutionizing heavy industrials is 2017. Year-over-year growth was 34.4% compared certainly a driver for growth in the company and to 2016. However, given the $3.91 decrease in per their industry. share profit due to to U.S. tax reform legislation, Caterpillar finished their most recent quarter at a loss Urbanization of Emerging Markets per share of $2.18, a YoY decrease of 9%. The global trend of urbanization is a key source of finding future growth in Caterpillar’s construction In terms of forward guidance in the report, and energy industries. Areas such as China and the management notes growth based on increased Middle East have grown and revenues for Caterpillar volume in end-user markets, commodity price trends in these areas shows it. In 2017, construction growth and the financial health of mining companies, and in both regions increased revenues more than $2 the continuation of increased demand for equipment 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 Forward emphasis on R&D regions will continue to demand a high volume of Caterpillar’s emphasis on innovation and future Caterpillar products as development continues to technology is a key to building future competitive grow in 2018. advantages within the industry. Over the past seven years, their research and development spending has Rebounding Commodity Markets averaged over $2.2 billion a year15, exceeding any Crashing commodity markets from mid-2013 into other mining and construction equipment competitor Q2 of 2016 destroyed any demand for Caterpillar’s on a basis of percentage of sales. Caterpillar has been resource industry products. The graph below shows the headwind of innovation and technology an index of global commodity prices from 2013 to development in the heavy machinery industry and as now. Given a benchmark of 2005, the index fell 98 we look to the future, this trend will continue for points from 184 in Q3 of 2014 to 86 in Q2 of 2016. years to come. Since then, we have seen a soft rebound in commodity markets through metals such as Copper, Weaknesses Aluminum, Tin, and Zinc. For Caterpillar, these Amount of Debt Obligations materials are key to driving resource demand growth, Caterpillar’s debt obligations are not to go unnoticed. especially in areas such as Latin America where Their debt to equity ratio was 368.99 in 2017 and copper, tin, and zinc mining is plentiful. total debt on their balance sheet stands just above Continuation of rising commodity prices from 2016 $36 billion. Looking at competitors, Caterpillar has and 2017 are key to growing revenues for Caterpillar to handle a considerable proportion more in in the coming years. 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 i Global Commodity Index, 2013-Today22 December 31, 2017, Caterpillar has $8.37 billion in underfunded pension liabilities. This is actually quite
common in the heavy manufacturing industry, as S.W.O.T. Analysis comparable companies such as General Electric have
up $30 billion in pension liabilities to account for. As Strengths it stands now, these underfunded pension plans do Extensive Dealer/Distribution Network not pose an immediate effect on Caterpillar’s As stated previously, Caterpillar’s independent business, however future environments could cause dealers combined with a global distribution network this to change. is the perfect combination to serve the 190 countries they operate in. Compared to their competitors, Opportunities Caterpillar is able to expand its already large Future of Automation customer base and capture market share in smaller Industrial automation is currently a race between markets where rapid growth is possible. many of the large players in the heavy machinery
industry. New applications are being tested and Brand Recognition applied every new iteration of products. Caterpillar Caterpillar’s brand portfolio is recognized as the and their trend of heavy R&D spending has put them most valuable heavy equipment manufacturing brand in a favorable place to make the first moves in in the world. It gives Caterpillar a strong advantage innovation. when entering new markets, as customers will habitually prefer the familiar choice. Beyond the Outlook of Global Renewable Energy Markets obvious Caterpillar and CAT Financial brands, they The global renewable energy market is robust and own other brands such as Electro-Motive, HYPAC, growing. The industry grew at a CAGR of 9% since CouplingAsiaTrak, and many others23. 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 grow each machinery segment in each region by has made moves such as an alliance with First Solar various changing annual growth rates. to develop photovoltaic solar solutions for micro- grid application. They also made a deal to distribute North America Cat-branded solar panels manufactured by First Out of the four geographic regions, North America Solar. In the near future, Caterpillar has the ability to has contributed the most to Caterpillar’s revenue continue making advancements in the renewable streams. Sales from North America make up 46.60% energy sector and create market share within the of Caterpillar’s total revenue. As identified above, industry. construction in North America is expected to increase by 4-6% in 2018, pushing revenue from this Threats area even higher. There is also opportunity for Impact of Government/Fiscal Policy Change CAT’s energy sector to benefit from increasing oil Changes in government throughout the world happen and gas activities such as fracking. Compression almost constant and the ability to keep up with units built by Caterpillar are used for many of the gas policy change in over 190 countries is justifiably and oil transportation applications around the United impossible. Changes in government could inhibit States. Due to these sources of demand, we see high future operations within a country and changes in a potential and upside to North American revenues in countries interest rate environment would alter sales future years. of Caterpillar’s products. For instance, current interest rate hikes are hindering customers’ ability to Latin America finance machine purchases, ultimately driving Revenue from Latin America has been the smallest revenue lower. contributor to Caterpillar’s total revenue by geological area. In 2017, only 9.13% of total sales Possibility of Market Correction came from the area, due to unstable economic Caterpillar’s revenue has a high correlation with conditions preventing customers from being able to consistent and positive economic growth. The rationalize the purchasing large machinery. possibility of a market correction with greatly affect However, Latin America stands to benefit greatly profitability of the company and create serious from increased viability of commodity mining, such concerns over how the company would repay their as copper, tin and iron ore. Our estimates assume considerable amount of debt obligations. strong double-digit growth in this region as commodity mining reestablishes itself in the area. VALUATION ANALYSIS Revenue by Geographic Region Valuation Summary Our process for determining the value of a single share of Caterpillar stock involves the application of 21.24% 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 46.60% based upon a select number of Caterpillar’s direct competitors and comparable companies. In order to 22.64% use these models, we used a number of assumptions as follows. 9.13% Key Assumptions North America Latin America EAME Asia/Pacifc Revenue Decomposition Caterpillar 2017 10k15 Our basis for breaking down revenue is by breaking up each heavy machinery segment into four different Europe, Africa, and the Middle East geological areas: North America, Latin America, EAME saw strong sales growth in 2017 primarily EAME (Europe, Africa, and the Middle East), and due to higher end-user demand and favorable price Asia/Pacific regions. From there, we were able to realization. CAT’s resource and construction industries saw 60% and 56% increases in fourth Important disclosures appear on the last page of this report. quarter revenues from 2016 to 2017. We believe Weighted Average Cost of Capital (WACC) improved economic stability across these regions Our group calculated Caterpillar’s WACC to be combined with the demand from urbanization in 7.41% through a Capital Asset Pricing Model for the emerging markets in these geographic regions will cost of equity and a corporate debt proxy for the cost continue growth into the coming years. of debt. We weighted these costs using a 71.35% weight in equity and a 28.65% weight in debt given Asia/Pacific their current market values. Our calculations are as Asia, specifically China, is creating demand through follows: increased building construction and infrastructure investments. Fiscal year 2017 was an impressive Cost of Equity year for construction heavy machinery sales in Asia To derive Caterpillar’s cost of equity, we used a risk and the Pacific, boasting a 46.5% return compared to free rate of 2.97%, an equity risk premium of 4.8%, 2016. Higher sales volume and favorable price and a raw beta of 1.295. Our risk free rate is based realization heavily offset the higher material costs. In upon the current yield of a 30-year U.S. Treasury 2018, we see sales volume remaining high until Q2. Bond24. The market risk premium of 4.80% is the Increasing material costs, primarily steel, will inhibit geometric average of the market premium from 1928 a lot of the growth later on into 2019. to today25. Finally, our beta is an average of various raw beta regressions through Bloomberg terminals. Gross Margin, Other Expenses After comparing multiple weekly and monthly betas Caterpillar’s cost of sales has historically stayed over various term lengths, we found 1.295 to be the consistent and we see current levels of cost control most appropriate measure of Caterpillar’s risk as unchanging in our forecasts. This makes sense exposure to the market. Using CAPM, we ended given that Caterpillar has remained in the heavy with a cost of equity of 9.19%. machinery industry for a substantial amount of time and cost structures have been able to reinforce Cost of Debt themselves. Since 2008, Caterpillar’s gross margin When calculating Caterpillar’s cost of debt, we first has ranged from 27-30%, with a most recent upside found the yield to maturity on a long horizon debt of 31% in 2017. Their continued commitment to instrument that closely compared to a 30-year efficiency and cost control is to be expected in the Treasury Bond. Given the large amount of debt coming years. We believe a gross margin close to issued by Caterpillar, we were able to find a 30% will effectively capture this idea. corporate bond maturing in 2047 with a yield to maturity of 3.75%26. In order to capture the tax As for other expenses and their forecasts, we used a benefits of the debt, we took this rate multiplied by 1 compounded annual growth rate (CAGR) as well as minus the marginal tax rate, giving us a final cost of historical averaging in order to estimate. Items such debt of 2.98%. as R&D, SG&A, and other operating expenses are all taking this approach. Valuation Models
Marginal Tax Rate Discounted Cash Flow & Economic Profit In December of 2017, the U.S. government passed a Between each of the models used in this valuation, bill to change the effective corporate tax rate from we believe the Discounted Cash Flow model and the 35% to 21%. Before this change, we calculated Economic Profit model are the most accurate Caterpillar to have around a 28.8% marginal rate. estimates for the intrinsic value of Caterpillar’s We estimated this rate by taking the 35% U.S. stock. Using both models, we were able to reach a corporate rate, subtracting 7% in deductions from price of 164.05. A common criticism of the model is non-U.S. subsidiaries taxed at other than 35%, and its weight in the continuous value (CV), also known then adding .8% back in state and local U.S. taxes. as the terminal value. In our model we used a Looking forward after recent tax legislation, we see conservative CV growth rate of 3.75% to limit a the foreign deductions eliminated almost completely. chance of overvaluing Caterpillar in their continuous We estimate a 20.8% marginal 2018 rate by taking state. We also used a CV return on investment the new 21% federal rate, subtracting only 1% now capital of 15%, which matches an average of our in foreign deductions, and then adding back our forecast period. Based on the results of this model unchanged .8% in state and local tax. 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 Gross Margin vs. SGA Expense expect. Given this result, we do not believe that the In comparing these two metrics, our goal was to dividend discount model should be used in understand the effects of Caterpillar’s future cost consideration of how to value a share of Caterpillar structure on its stock price. Since we project common stock. Caterpillar to increase revenues in our forecasted years, we also made the assumption that its Gross Relative Valuation Model Margin would increase. Given a gross margin Similar to the Dividend Discount Model, we between 30-32% and SGA as 9.6 to 12% of total determined that the Relative Valuation Model is not revenue, our analysis yielded a price range of a valuable measure of estimating the intrinsic value $128.69 to $199.41. 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 Marginal Tax Rate vs. Cost of Debt much lower P/E ratio when compared to CAT. In comparing these two metrics, our goal was to Looking at our 2018 industry P/E average of 14.51, understand how each metric would affect our stock it is almost half of Caterpillar’s P/E of 26. The price given then both influence our WACC and other second relative metric we used was the Price to forecasted estimates. Given the change to recent tax Earnings Growth (PEG) ratio. Using the PEG ratio, corporate tax rates, we may have made a mistake in we calculated CAT’s relative value to the industry Caterpillar’s foreign tax benefit. This sensitivity average to be $32.88 in 2018 and $36.39 in 2018. analysis will allow us to capture a range of possible Given the slow rate that we estimated Caterpillar to outcomes. We used cost of debt as one of our inputs grow their EPS by in the next 5 years, this skewed to estimate any future changes in Caterpillar’s debt our model heavily towards a lower price. With that structure, such as a change in debt rating, to its stock being said, we advise to ignore the results of the price. Given these variables, our analysis gave us a Relative Valuation analysis given Caterpillar’s price between $168.24 and $159.84. 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 Risk Free Rate vs. Beta any model can heavily determine the final price, it is In comparing these two metrics, our goal was to important to understand how sensitive our price is to understand the effects of change in the risk-free rate a change in steady state assumptions. Based on an and beta as variables in our cost of equity. Given the ROIC spread from 13-17% and a CV growth spread possibility of three to four rate hikes and its effect on from 3.35%-4.15%, we found that Caterpillar’s the risk-free rate, we wanted to capture a range of intrinsic stock price could range from $146.68 to different possibilities given how severe interest rates $185.25 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.
REFERENCES 14. Trading Economics, US Housing Starts. https://tradingeconomics.com/united-states/housing- 1. S&P Global, S&P 500 Industrials Growth, Ticker: starts S5INDU, https://us.spindices.com/indices/equity/sp- 15. CAT 2017 10k. Securities Exchange Commission 500-industrials-sector Website. 2. Trading Economics, United States GDP Growth, 16. CMI 2017 10k. Securities Exchange Commission https://tradingeconomics.com/united-states/gdp- Website. growth 17. Komatsu, Ltd. 2017 Annual Report. 3. US Department of Treasury, US Treasury Long https://home.komatsu/en/ir/annual/html/2017/ Term Interest Rate Data Visualization, 18. Hitachi, Ltd. 2017 Annual Report. https://www.treasury.gov/resource-center/data-chart- http://www.hitachi.com/IR- center/interest-rates/Pages/Historic-LongTerm-Rate- e/library/integrated/index.html Data-Visualization.aspx 19. AB Volvo, The Volvo Group 2017 Annual Report. 4. Trading Economics, US Unemployment Graph, http://www.volvogroup.com/content/dam/volvo/volv https://tradingeconomics.com/united- o-group/markets/global/en-en/investors/reports-and- states/unemployment-rate presentations/annual-reports/annual-and- 5. St. Louis Federal Reserve Bank, Industrial sustainability-report-2017.pdf Production Index (INDPRO). 20. Caterpillar 2017 Q4 Quarterly Report. https://fred.stlouisfed.org/series/INDPRO https://www.caterpillar.com/content/dam/caterpillar 6. St. Louis Federal Reserve Bank, Real Gross DotCom/releases/4Q17%20Caterpillar%20Inc.%20 Domestic Product Index (GDPC1). Results.pdf https://fred.stlouisfed.org/series/GDPC1 21. Caterpillar Global Website. https://www.cat.com/ 7. Ann Duignan, J.P. Morgan, US Machinery, Update 22. St. Louis Federal Reserve Bank, Global Commodity on Steel & Aluminum Import Tariffs. March 1st, Index (PALLFNFINDEXQ). 2018. Access via Bloomberg Terminal. https://fred.stlouisfed.org/series/PALLFNFINDEXQ 8. St. Louis Federal Reserve Bank, Producer Price 23. Caterpillar Official Website, Our Brands. Index by Commodity for Metals and Metal Products: https://www.caterpillar.com/en/company/brands.htm Hot Rolled Steel Sheet and Strip (WPU10170301). l https://fred.stlouisfed.org/series/WPU10170301 24. Bloomberg Terminal, Command: PX1
11. Institute for Supply Management, ISM Backlog of Orders Index for March 2018. https://www.instituteforsupplymanagement.org/ISM Report/MfgROB.cfm?SSO=1#backlogOrders 12. Caterpillar Official Website, Surface Mining with CAT Command, https://www.cat.com/en_US/by- industry/mining/surface-mining/surface- technology/command.html 13. Oldcastle Business Intelligence, 2018 North American Construction Forecast Report. Published October 2017.
Important disclosures appear on the last page of this report.
Caterpillar, Inc. Income Statement All numbers in millions unless noted Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2024E 2025E 2026E Sales 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 46449 Depreciation 2,709 2,708 2,554 2682 2816 2957 3104 3260 3423 3594 3773 3962 4160 Amortization 337 326 323 322 316 305 287 278 262 244 223 198 186 Selling, general & administrative expenses 5,199 4,686 5,177 5532 5821 6080 6284 6496 6722 6956 7199 7450 7711 Research & development expenses 2,165 1,951 1,905 2049 2156 2252 2328 2406 2490 2576 2666 2759 2856 Interest expense of financial products 587 596 646 489 464 441 419 398 378 359 341 324 308 Investment & interest income (expense) 65 74 122 246 258 271 284 299 314 329 346 363 381 Goodwill impairment charge 0 595 0 0000000000 Other 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 507 505 531 236 224 213 203 192 183 174 165 157 149 Other 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 1593 Profit (loss) of consolidated companies 2,113 -53 743 3469 3955 4473 4688 4900 5129 5365 5608 5859 6105 Less: profit (loss) attributable to noncontrolling interests -11 -8 -5 0000000000 Profit (loss) 2,102 -67 754 $3,469 $3,955 $4,473 $4,688 $4,900 $5,129 $5,365 $5,608 $5,859 $6,105
Weighted average shares outstanding-basic 594 584 592 599 603 606 610 613 616 620 621 621 621 Year end shares outstanding 582 586 598 601 604 608 611 615 618 621 621 621 621 Net profit (loss) per share - basic$ 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 Sheet All numbers in millions unless noted 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2024E 2025E 2026E Assets Current 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
Liabilities Current 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' equity Redeemable 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 Statement All numbers in millions unless noted Fiscal Years Ending Dec. 31 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Cash 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 2,877 Actuarial loss (gain) on pension & postretirement benefits ------985301 Provision (benefit) for deferred income taxes ------431 1,213 Goodwill 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 -1,151 Inventories -833 2,501 -2,667 -2,927 -1,149 2,658 101 2,274 1,109 -1,295 Accounts payable - -2,034 2,570 1,555 -1,868 134 222 -1,165 -200 1,478 Accrued expenses - -505 117 308 183 -108 -10 -199 -201 175 Accrued wages, salaries & employee benefits - - 847 619 -490 -279 901 -389 -708 1,187 Customer advances 286 -646 604 173 241 -301 -593 -501 -37 -69 Other assets, net -470 235 358 -91 252 -49 -300 -220 224 -192 Other 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 -898 Expenditures for equipment leased to others -1,566 -968 -1,011 -1,409 -1,726 -1,924 -1,840 -1,873 -1,819 -1,438 Proceeds from disposal of leased assets & property, plant & equipment - - - 1,354 1,117 844 904 760 899 1,164 Additions to finance receivables -14,031 -7,107 -8,498 -10,001 -12,010 -11,422 -11,278 -9,929 -9,339 -11,953 Collections of finance receivables 9,717 9,288 8,987 8,874 8,995 9,567 9,841 9,247 9,369 12,018 Proceeds from sale of finance receivables 949 100 16 207 132 220 177 136 127 127 Investments & acquisitions, net of cash acquired -117 -19 -1,126 -8,184 -618 -195 -30 -400 -191 -59 Proceeds from sale of business & investments, net of cash sold - - - 376 1,199 365 199 178 - 100 Proceeds from sale of securities 357 291 228 247 306 449 810 351 694 932 Investments in securities -339 -349 -217 -336 -402 -402 -825 -485 -391 -1,048 Other 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 -1,831 Common stock issued, including treasury shares reissued 135 89 296 123 52 128 239 33 -23 566 Treasury 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 6 361 Financial 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 -1,465 Financial 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 -3,058 Excess 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 -3,653 Effect of exchange rate changes on cash 158 1 -76 -84 -167 -43 -174 -169 -28 38 Increase (decrease) in cash & short-term investments 1,614 2,131 -1,275 -535 2,433 591 1,260 -881 708 1,093 Cash & 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 7,168 Cash & 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 Statement All 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 2026E Sales 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 2026E Cash & 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%
Liabilities Current 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' equity Common 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 2026E EBITA: Operating Revenues 47011 38537 45565 51226 53898 56299 58189 60146 62239 64407 66654 68984 71398 Cost of Goods Sold (COGS) 33742 28309 31049 33197 35055 36639 37868 39139 40500 41909 43369 44882 46449 SG&A 5199 4686 5177 5532 5821 6080 6284 6496 6722 6956 7199 7450 7711 R&D Expense 2165 1951 1905 2049 2156 2252 2328 2406 2490 2576 2666 2759 2856 Depreciation and Amortization 3046 3034 2877 3004 3132 3262 3391 3538 3685 3838 3996 4160 4346 Implied Interest on Operating Leases 87 74 70 75 79 79 81 80 78 77 77 78 79 EBITA 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 0000000000 ‐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 41 Adjusted Taxes 1156 775 3773 1121 1242 1368 1416 1460 1509 1561 1616 1673 1729
Plus Change in Net Deffered Tax Liabilities
DTLt ‐ 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 ‐2196 Change 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 328 364 207 268 336 411 485 557 629 700 769 837 903 Accounts 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 21,669 Inventory 9,700 8,614 10,018 10,518 10,929 11,312 11,621 11,914 12,184 12,460 12,731 12,995 13,238 PPD 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 2,342 Operating 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 10,165 Accrued 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 5,046 Deferred 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 1,869 Operating 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 21072 Plus: 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 20,953 Plus: PV Operating Leases 839 722 688 655 624 594 566 539 514 489 466 444 423 Plus: Receivables‐ Finance/Trade & Other 14821 14585 14532 15257 15854 16409 16857 17282 17674 18075 18467 18850 19203 Plus: Net Intangible Assets 2821 2349 2111 2216 2303 2384 2449 2511 2567 2626 2683 2738 2790 Plus: 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 2,679 Less: 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 13,108 Invested 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 $7,096 EP ‐$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 Equity Risk‐free Rate 2.97% Market Risk Premium 4.80% Beta 1.295 Cost of Equity 9.19%
Cost of Debt Pre‐tax cost of debt 3.75% Tax rate 20.7% Cost of Debt 2.98%
Cost of Preferred 0.00%
Market Value of Equity Share Price $150.23 Shares Outstanding 597.63 Market Value of Equity $89,781
Market Value of Debt ST and Current Portion of LT $11,031 Long Term $24,350 PV of Oper. Leases 688 Market Value of Debt $36,069
Market Weights % Equity 71.34% % Debt 28.66% 100.00%
WACC 7.41% Caterpillar, Inc. Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs: CV Growth 3.75% CV ROIC 15.00% WACC 7.41% Cost of Equity 9.19%
Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
DCF Model Period 12345678910Model Date 4/12/2018 NOPLAT 6164 6345 6554 6769 6978 7210 7443 7685 7937 8187 Next FYE 12/31/2018 CapEx 375 1317 1319 1354 1283 1201 1237 1212 1185 1091 Last FYE 12/31/2017 Free Cash Flow (FCF) 5789 5027 5236 5415 5695 6009 6206 6473 6752 7096 Days in FY 365 Continuing Value 167,809 Days to FYE 102 Elapsed Fraction 0.279 Discount Period 1234567899Adjusted Stock Price 164.05 PV of FCF 5390 4358 4225 4068 3984 3913 3763 3654 3549 88194
Value of Oper. Assets 125,097 +Value of Non‐Oper. Assets 10495 ‐Value of Debt 36069 ‐Value of Other 9,753
Value of Equity 89,770 Shares Outstanding 598 Intrinsic Value 150.21
EP Model Period 12345678910 NOPLAT 6164 6345 6554 6769 6978 7210 7443 7685 7937 8187 Beg Invested Capital 42,437 42,812 44,130 45,448 46,802 48,086 49,287 50,524 51,736 52,920 ROIC 14.53% 14.82% 14.85% 14.89% 14.91% 14.99% 15.10% 15.21% 15.34% 15.47% WACC 7.41% 7.41% 7.41% 7.41% 7.41% 7.41% 7.41% 7.41% 7.41% 7.41% Economic Profit (EP) 3020 3173 3284 3401 3511 3648 3791 3941 4103 4266 Continuing Value 114889
Discount Period 1234567899 PV of Economic Profit 2811 2750 2650 2556 2456 2375 2298 2225 2157 60381
Value of EP 82660 +Beg. Invested Capital 42437 Value of Operating Assets 125097 +Value of Non‐Oper. Assets 10495 ‐Value of Debt 36069 ‐Value of Other 9,753
Value of Equity 89,770 Shares Outstanding 598 Intrinsic Value 150.21 Caterpillar, Inc. Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
EPS$ 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) 13.79 EPS (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 5.31 Discount Periods 123456789 9 Future 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 4/12/2018 Next FYE 12/31/2018 Last FYE 12/31/2017 Days in FY 365 Days to FYE 102 Elapsed Fraction 0.279 Caterpillar, Inc. Relative Valuation Models
EPS EPS Est. 5yr Ticker Company Price Market Cap Enterprise Value 2018E 2019E P/E 18 P/E 19 EPS gr. PEG 18 PEG 19 VOLV‐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 Ratios Cash 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 1.04 Current 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 1.92 Quick 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 Ratios Total 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 1.18 Inventory 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 4.03 Receivable 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 Ratios Debt 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 87.25 Debt 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 31.94 Long 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 Ratios Return 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 Ratios Dividend 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 Operating Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Leases 2018 211 2017 211 2016 237 2019 142 2018 160 2017 183 2020 104 2019 107 2018 140 2021 74 2020 81 2019 93 2022 58 2021 61 2020 68 Thereafter 169 Thereafter 176 Thereafter 205 Total Minimum Payments 758 Total Minimum Payments 796 Total Minimum Payments 926 Less: Interest 70 Less: Interest 74 Less: Interest 87 PV 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 Lease Year Commitment Payment Year Commitment Payment Year Commitment Payment 1 211 204.9 1 211 204.9 1 237 230.1 2 142 133.9 2 160 150.9 2 183 172.6 3 104 95.2 3 107 98.0 3 140 128.2 4 74 65.8 4 81 72.0 4 93 82.7 5 58 50.1 5 61 52.7 5 68 58.7 6 & beyond 58 137.8 6 & beyond 61 143.6 6 & beyond 68 167.0 PV 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 Operating Fiscal Years Ending Leases Fiscal Years Ending 152.544828637025 Leases Fiscal Years Ending 166.058897319016 Leases 2015 229 2014 244 2013 254 2016 174 2015 180 2014 193 2017 125 2016 133 2015 139 2018 92 2017 99 2016 104 2019 65 2018 74 2017 74 Thereafter 189 Thereafter 229 Thereafter 239 Total Minimum Payments 874 Total Minimum Payments 959 Total Minimum Payments 1003 Less: Interest 81 Less: Interest 92 Less: Interest 97 PV 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 Lease Year Commitment Payment Year Commitment Payment Year Commitment Payment 1 229 222.4 1 244 236.9 1 254 246.7 2 174 164.1 2 180 169.7 2 193 182.0 3 125 114.5 3 133 121.8 3 139 127.3 4 92 81.8 4 99 88.0 4 104 92.5 5 65 56.1 5 74 63.9 5 74 63.9 6 & beyond 65 154.2 6 & beyond 74 186.3 6 & beyond 74 194.0 PV 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 CAT Current Stock Price $150.23 Risk Free Rate 2.97% Current Dividend Yield 2.06% Annualized St. Dev. of Stock Returns 23.03%
Average Average B‐S Value Range of Number Exercise Remaining Option of Options Outstanding 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): 21,499,895 Average Time to Maturity (years): 6.32 Expected Annual Number of Options Exercised: 3,402,582
Current Average Strike Price:$ 86.86 Cost of Equity: 9.00% Current Stock Price: $150.23
2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E Increase in Shares Outstanding: 3,402,582 3,402,582 3,402,582 3,402,582 3,402,582 3,402,582 3,402,582 Average Strike Price:$ 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 510,150 494,846 480,000 465,600 451,632 438,083 424,941 412,192 399,827 387,832 Expected 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) 597,626,000 601,025,186 604,424,746 607,824,639 611,224,828 614,625,280 618,025,967 621,426,862 621,425,361 621,424,026 Plus: 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 0 Less: 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