Caterpillar Inc.

April 1, 2016

Company Overview

Caterpillar Tractor Company was formed by the

merger of theHolt Manufacturing Companyand
theC. L. Best Tractor Company in 1925
Incorporated again in 1986 under the current name
Caterpillar Inc.
Headquarters Located in Peoria, Illinois, USA.
Caterpillar is the worlds leading manufacturer of
construction and mining equipment, diesel and
natural gas engines, industrial gas turbines dieselelectric locomotives.
Operates through three product segments:
Machinery, Energy & Transportation
Also has a Financial Products segment

Major Events in Last 5

years

Caterpillar Inc. has acquired a number of

companies in the resource, energy and
transportation sectors
These acquisitions helped Caterpillar Inc.
expand its portfolio and allow caterpillar to
provide comprehensive solution to its
customers
D.R. Oberhelman was named as chairman of
the board and CEO of Caterpillar Inc.
Caterpillar acquired and divested Bucyrus
(Bucyrus was a manufacturer of mining
machinery)
In 2014 Caterpillar Inc. added sustainability
to its core values in action

Prospects

Present CEO has stressed on cost management,

restructuring actions and operational execution
Caterpillar saved US $ 2.3 billion by
restructuring and making its processes leaner
Decline in commodity prices meant a boon for
the Caterpillar as it saved 38% on cost of goods
sold
Caterpillar sees 2016 revenue within a range of
US $40-$44 billion. The midpoint of that range,
$42-billion, is around $3.5-billion below its
forecast in October.
Sales and revenues will remain under pressure
from weak commodity prices and slowing
economic growth in developing countries

Governance Analysis

Features of board structure:

Combined CEO and Chairman of the Board;

Presiding Director;
Independent Directors; and
Committees comprised entirely of independent directors.

Currently 12 Directors

Only 2 directors can be non-independent

Chairman (and CEO) is the only non-independent director
Independent Directors = business, education, government
and public policy background.
Three standing committees: Audit, Compensation and HR, and
Public Policy and Governance

Major Shareholders

Major Shareholders

Major Shareholders

Executive Compensation
COMPONENTS
Base salary - smallest component of the
compensation structure
Stock option - has the biggest share as it links
executives compensation to stockholder
expectations
Executive Short Term Incentive Plan (ESTIP)
based on corporate and business unit
performance
Strategic Performance Plan (SPP) long term
incentives - based on company success in the
long-run

Executive Compensation

Executive Compensation

Executive Compensation
CEOs in the S&P 500 list earned
$12.7 million on average in 2014
Thus, Caterpillars CEO
compensation was above average
($14.7 million)
CEO compensation has climbed
14% in 2014
However Caterpillars sales have
dropped about $10 billion in 20132014
Over 2014, the stock has tumbled
19 percent

Ratio Analysis - Liquidity

Liquidity - Current Ratio
20 20 20 20 20
15 14 13 12 11
Cate
rpill
ar

1. 1. 1. 1. 1.
31 39 40 43 34

Deer 2. 2. 2. 2. 2.
e&
06 17 05 24 07
Com
pany

CMI

Corp
orati
on

Lower
ratio
than
competitors
2. 2. 2. 2. 1.
Higher
risk
09 25 57 29
94 for shortcomings

Ratio Analysis Efficiency

Efficiency - Assets
Turnover Ratio
2
0
1
5
Cat
erpi
llar

Dee
re

&
Co
mp
any

2
0
1
4

2
0
1
3

2
0
1
2

2
0
1
1

0. 0. 0. 0. 0.
5 6 6 7 8
8 5 4 7 3

Within
with competitors
0. 0. 0. range
0. 0.
4 6 6 6 7
Relatively
low
turnover
8 0 5 9 0
Higher depreciation and storage

Ratio Analysis - Stability

Stability - Debt to Equity
Ratio
20 20 20 20 20
15 14 13 12 11
Cate
rpill
ar

2. 2. 1. 2. 2.
57 35 81 29 69

Deer 5. 4. 3. 4. 3.
e&
47 08 36 74 91
Com

pany

Higher and lower than some

Overall
CMI
0. 0. 0. 0.relatively
0.
high debt ratio
Corp 22 22 23 12 14
Higher risk in slower markets
orati
on

Ratio Analysis - Growth

Growth - Annual
Revenue Growth
2
0
1
5
Cat
erpi
llar

Dee
re
&

2
0
1
4

2
0
1
3

2
0
1
2

2
0
1
1

- 9. 4
1 0. 1 5 1.
4. 8 5. 4 2
8 5 5 % 1
1 % 1
%
%
%

General negative trend for all

Caterpillar has highest growth
- 4. 1 2
decline
1 4.
9. 5

5 2. 3.
3 9 1

Dividend Policy
2

Divid

ends

per

Share

Dividend
based on
1 1 1 1 policy
1
, , , , ,
stability
Total
7 6 4 3 1
Steady
yearly increase
Cash
8 6 9 1 7
regardless of market

Valuation and Stock Price

Determination

Assumptions:
WACC
statement

Long term Growth

Rate of Free Cash
Flow
Sales growth
2016-2017
Sales Growth
2018-2020
Sales Growth
after 2020
Current
assets/Sales
Other
assets/Sales
Current
liabilities/Sales
Net fixed
assets/Sales
Costs of goods
sold/Sales
SGA/Sales

Based on 2011 2015 income and balance

6.38%
5%
-5%
1%
3%
58%
52%
50%
29%
68%
14%

Free cash flow calculation

(in US Millions)

Based on assumptions used to derive the free cash

flow forecasts for the next ten years

Year

2
0
1
6

2
0
1
7

2
0
1
8

2
0
1
9

2
0
2
0

2
0
2
1

2
0
2
2

2
0
2
3

2
0
2
4

2
0
2
5

Profit 27 24 23 22 20 18 16 14 11 87
76 97 87 10 06 62 74 49 85 5.
after
.6 .0 .0 .7 .3 .5 .3 .9 .3 8
tax
Add
30 31 34 38 42 47 52 58 64 71
back
82 93 88 55 60 18 36 08 39 36
depreci .6 .3 .8 .7 .1 .4 .5 .5 .7 .4
ation
Subtra
ct
- - - - - - - increas 22 13 24 24 24 74 77 79 81 84
72 86
2. 4. 7. 9. 1. 5. 8. 3.
e in
.8 .2
5 9 3 5 9 1 9 5
current
assets
Add
back
increas - - 20 21 21 64 66 68 70 72
42 11
8. 0. 2. 4. 3. 3. 3. 4.
e in
76 91

Use of model to value

firm
Stage 1 - Calculating the
Terminal Value
Weighted
average
cost of
capital,
WACC
Long-term
growth
rate of
FCFs, g

6.3
8%

5.0
0%

Year 10
32
FCF (or
8.3
year 2025)
24
Terminal
97
value
6.5
Present
value of
13
the
45
terminal
6.5
Value

Stage 2 - Calculating Total

Free Cash Flow (FCF)

Year

2 2 2 2 2 2
20 20 20 20 0 0 0 0 0 0
16 17 18 19 2 2 2 2 2 2

Per share valuation:

582 million shares

Notes about model

Caterpillars Stock price as reported
in the stock exchange on March 26,
2016 was 75.25USD
A comparison of share price to our
model ($65.20 USD) would suggest
that CAT is currently overvalued
This result could also indicate that
our assumptions are not realistic

Capital Structure - 2015

Com
pany

Capital
Structure
Debt

Inter
est
Cove
Equi rage
ty
Rati
o
(EBI
T/Int
erest
Expe
nse)

Cate 77.68 22.32

%
%
rpilla

Capital Structure
Debt: Rocket Booster or Anchor

In 2008, Caterpillar had a capital

structure of 89% debt and 11%
equity
The company realized that this
amount of debt was quite high
especially with the recession which
began to reduce sales
They began to reduce overhead
costs and pay down their debt. By
2012 they had a capital structure of

Cost of Capital
Cost of capital indicates how the market
views the risk of Caterpillars assets
Assumptions:

No flotation cost listed in Bloomberg data

YTM is 1.77% from Bloomberg
Dividend growth and CAPM methods were used

to calculate cost of equity and WACC. Preferred

method was Dividend growth
Beta was not calculated, and Bloomberg value
was used
Market Risk Premium is 5.5% from Bloomberg
Caterpillar does not issue preferred shares

Cost of Debt

1.7
Cost of Debt 7%

Indicates the required return on

After tax
1.3
Caterpillar
long
term
debt
Cost of Debt 1%
Flotation cost is 0
YTM is 1.77%

Cost of Equity
Cost of
Equity Using
Dividend
Growth
10.
Model
94%
Cost
of
Indicates
the return required by equity
Equity
Using 10.
investors
given the risk of the cash
CAPM
57%
flows from
Caterpillar
Used both Dividend Growth, and CAPM

Methods, both resulted in similar

values
Risk Free rate used is 1.77%

WACC
WACC using
dividend
growth
6.3
model
38%
Indicates the average cost of capital for
Caterpillar.
WACC
using This
6.1 average is the required return
on Caterpillars
CAPM
5% assets based on the market
perception of the risk of those assets
Used Cost of Equity calculated using Dividend
Growth, and CAPM Methods, both resulted in
similar values
Weight of common equity, preferred equity, and
long term debt as 52.5%, 0%, and 47.5%

Beta ()

Indicates whether the investment is

more or less volatile than the market
Since is more than 1, the Caterpillar
stock
is
considered
more
volatile
than
Beta ()
1.6
the market
for Deere & Co is 1.12. For CMI 1.47
Not calculated. was obtained from
Bloomberg

Recommendation for
Investment
We

would not recommend to invest

in this company given the following:
Decreasing free cash flow
Overvaluation of stock price
More volatile stock than the

competitors ()
High debt ratio while growth in decline