CaterpillarInc.(CAT)
CompanyDescription:
Caterpillar is the world’s leading manufacturer of construction and
mining equipment, diesel and natural gas engines, industrial gas
turbines,anddiesel‐electriclocomotives.Thecompanyalsoisaleading
services provider through Caterpillar Financial Services, Caterpillar
RemanufacturingServices,andProgressRailServices.
InvestmentThesis:
I believe U.S. and global economies will continue to see slow growth.
Coming out of a severely deep recession in combination with central
banks exerting aggressive monetary policy, this cycle may stretch out
longer than historic norms. Mining sales will be down through 2014
duetoadecreaseinmininginvestmentworldwide.Thiswillbeoffset
byincreasedconstructionactivity.TherecoveringU.S.housingmarket
should provide a boost in construction as well as to the overall U.S.
economy.Emergingmarketeconomicgrowthwillcontinuetooutpace
developedeconomies,expandingtheglobalmiddleclass.Chinaandthe
Asia Pacific region provide the greatest growth opportunity for all
segmentsofCATbusiness.Wewillcontinuetoseemacro‐environment
volatility in the near‐term. CAT stock price will likely remain
inexpensive, yet volatile through the first quarter of 2013 until Fiscal
Cliffuncertaintyisresolvedandtheconstructionseasonbeginsagain.
Risks:
 SlowingU.S.andglobalGDPgrowth
 WorseningofEuropeanSovereignDebtCrisis
 SlowdowninemergingmarketeconomiessuchasChina,India,and
Brazil
 EconomicVolatility
 Decreaseinminingindustryinvestmentintheshort‐term
 Highinventorylevels
Opportunities:
 ContinuedU.S.andglobalGDPgrowth
 Emerging markets (especially Asia‐Pacific) and an expanding
middleclass
 New technology demands as emissions standards and
environmentalregulationsareraised
 U.S.,Chinese,andotheremergingmarketconstructionintheshort‐
term
 Mininginthelong‐term
 U.S.housingmarket
 Domesticenergyproduction
FisherCollegeof
BusinessEquity
Research
November20,2012
Overweight–BUY
CAT
Price:$81.93
PriceTarget:$103.00
Industrials
MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
12‐MonthStockPerformance
_____________________________________________
CompanyData
Price: $81.93
DateofPrice: 16Nov12
52‐WeekRange($): 78.25–116.95
MarketCap($bn):
53.58
FiscalYearEnd:
Dec31
SharesO/S(mn):
669
PriceTarget($):
$103.00
UpsidePotential:
26%
Dividend&Yield
2.08(2.50%)
_____________________________________________
MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
TableofContents
1.CompanyOverview.........................................................................................................................................................................2
a.MachineryandPowerSystems..................................................................................................................................................2
i.ConstructionIndustries............................................................................................................................................................2
ii.ResourceIndustries..................................................................................................................................................................2
iii.PowerIndustries......................................................................................................................................................................3
b.FinancialProducts..........................................................................................................................................................................3
c.DealersandDistributors..............................................................................................................................................................3
2.EconomicAnalysis...........................................................................................................................................................................4
3.IndustrialSectorAnalysis...........................................................................................................................................................4
4.CompanyAnalysis...........................................................................................................................................................................7
a.Strategy................................................................................................................................................................................................8
b.CompetitiveAnalysis.....................................................................................................................................................................8
c.CompetitiveLandscape.................................................................................................................................................................9
d.ThirdQuarterEarningsResults.............................................................................................................................................12
e.TrendAnalysis...............................................................................................................................................................................13
f.EquityValuation:ComparativeMultiples...........................................................................................................................15
i.AbsoluteValuation...................................................................................................................................................................15
ii.RelativeValuation:CATvs.S&P500,IndustrialSector,andMachineryIndustry.......................................15
5.SummaryandRecommendations.........................................................................................................................................16
6.Appendix............................................................................................................................................................................................17
a.IncomeStatementForecast.....................................................................................................................................................17
b.BusinessSegmentForecast......................................................................................................................................................18
c.DiscountedCashFlowsValuation..........................................................................................................................................19
1 MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
1. CompanyOverview
Originally organized as Caterpillar Tractor Co. in 1925 in the State of California, the company was
reorganized as Caterpillar Inc. in 1986 in the State of Delaware. Caterpillar is the world’s leading
manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas
turbines, and diesel‐electric locomotives. The company also is a leading services provider through
CaterpillarFinancialServices,CaterpillarRemanufacturingServices,andProgressRailServices1.
a. MachineryandPowerSystems
i.
ConstructionIndustries
Construction industries products are primarily used in infrastructure and building construction
applications. Much of the growth in the construction industries segment has occurred in developing
countries. In many instances, construction machinery sales have been at or above record levels set pre‐
recession. Sales have also increased in developed countries driven by the need for existing construction
machineryusersupgrading/replacingexistingmachinery.CAT’sconstructionmachineryinvestmentshave
primarilybeenoccurringintheU.S.,Brazil,andAsiasinceclimbingoutoftherecession.
ConstructionIndustriesproductportfolioincludesthefollowingmachinesandrelatedparts:
Backhoeloaders
Miniexcavators
Mediumwheelloaders
Smallwheelloaders
Compactwheelloaders
Mediumtrack‐typetractors
Smalltrack‐typetractors
Selectworktools
Track‐typeloaders
Skidsteerloaders
Wheelexcavators
Motorgraders
Multi‐terrainloaders
Small,mediumandlargetrack
Pipelayers
excavators
2
ii.
ResourceIndustries
Cat’s Resources Industries segment primarily supports customers using machinery in mining and quarry
applications.Thissegmentalsoservesforestry,tunneling,andpavingcustomers.Recentlyin2010,CAT
acquired Bucyrus International, one of the largest underground mining machinery manufacturers in the
world.CATnowhasthebroadestlineofminingmachineryandequipmentofanycompanyglobally.CATis
investingheavilyinitsminingmachinerybusinessintheU.S.andAsia.CAT’slargestglobalcompetitorin
miningmachineryisJoyGlobal,thoughCAThasanumberofothercompetitorswithothermachinerytypes
intheirResourcesIndustrysegment.JoyglobalhasasmallerlineofproductofferingsthanCAT.
1www.caterpillar.com
22011Caterpillar10‐K 2 MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
ResourceIndustriesproductportfolioincludesthefollowingmachinesandrelatedparts:
Electricropeshovels
Largeminingtrucks
Wheeldozers
Largeelectricdrivemining
Draglines
trucks
Compactors
Hydraulicshovels
Tunnelboringequipment
Selectworktools
Drills
Largewheelloaders
Forestryproducts
Highwallminers
Off‐highwaytrucks
Pavingproducts
Undergroundmining
equipment
Articulatedtrucks
Machinerycomponents
Electronicsandcontrol
Largetrack‐typetractors
Wheeltractorscrapers
systems
iii.
PowerIndustries
CAT’sPowerIndustriessegmentservescustomersusingreciprocatingengines,turbinesandrelatedparts
forindustriesservingelectricpower,Industrial,petroleumandmarineapplicationsaswellasrail‐related
businesses.Muchofthegrowthinthissegment,asinCAT’sothersegments,isoccurringindeveloping
countries.CAT’smaincompetitorsgloballyinthissegmentincludeGEEnergyinfrastructure,Siemens
Energy,andWartsilaCorp.
PowerSystemsportfolioincludes:
Reciprocatingenginepoweredgeneratorsets
Integratedsystemsusedintheelectricpowergenerationindustry
Reciprocatingenginesandintegratedsystemsandsolutionsforthemarineandpetroleum
industries
ReciprocatingenginessuppliedtotheindustrialindustryaswellasCaterpillarmachinery
Turbinesandturbine‐relatedservices
Diesel‐electriclocomotivesandcomponentsandotherrail‐relatedproductsandservices.
3
b. FinancialProducts
CAT Financial’s primary business is to provide retail and wholesale customers financing options to help
purchaseCATproducts.CATusesitsfinancingbusinesstohelpdrivedemandforitsproductsalloverthe
world,butespeciallyindevelopingcountrieswherecredittomakesuchlargepurchasesismuchharderto
come by4. In addition to increasing sales opportunities for CAT products, CAT Financial also generates
financing income. CAT Financial’s major competitors include commercial banks and other financial
institutions.
c. DealersandDistributors
CAT’sproductsaresold throughaworldwidenetworkofdealerships,50 ofwhicharelocatedintheU.S.
and141outsideoftheU.S.CATdealersservemorethan180countries5withCATandCATrelatedfacilities
32011Caterpillar10‐K
4AnneDuignan,JPMorganMachineryAnalyst,Interview,September7,2012
52011Caterpillar10‐K 3 MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
spanningmorethan500locationsworldwide.ThisallowsCATtobeclosetotheirglobalcustomerbase.
CAToffersmorethan300products6.
2. EconomicAnalysis
Both CAT management and analyst consensus forecast positive GDP growth around the world through
2014.Analystconsensusforecastsalsopredictslowlydecliningunemploymentaroundtheworldthrough
20147. The U.S. Housing market has been seeing growth in construction, inventory has continued to
tighten, and residential home prices have experienced their 7th straight month of appreciation8. An
abnormal characteristic of the current housing recovery is that it is occurring very late in the economic
recovery.Thusfar,theeconomicrecoveryhasbeendrivenprimarilybymonetarypolicyandinvestment.
IftheU.S.housingmarketcontinuesonitscurrentrecoverytrack,thiswilllikelyhelpeconomicgrowthin
theU.S,creatingjobs,increasingdomesticspending,andboostingconsumerconfidence.
As central banks the world over have been trying to prevent deflation, encourage inflation, provide
liquidity, and generally prevent another worldwide recession, they have been taking very aggressive
actionswithmonetarypolicytoachievethesegoals.Becauseofthis,Ibelievewemayexperiencehigher
thannormallevelsofinflationintheyearstocome,addingtonominalgrowth,makingitadvantageousto
be invested in physical assets that have real value, whether that be real estate companies that produce
physicalproductssuchasCAT.Becauseofthiscombinationofaggressivemonetarypoliciesandthelate
recoveryintheU.S.housingmarket,thiseconomiccyclewilllikelystretchoutlongerthanhistoricnorms.
Emergingmarketsarelikelytocontinueoutpacingdevelopedcountriesineconomicgrowth,thusgrowing
the global middle class (esp. China), which will result in greater demand for infrastructure development
and consumer goods; both drivers for natural resource consumption which should lead to a continued
increaseinminingactivityoverthelong‐term9.
Lastly, the increase in domestic energy production resulting in lower domestic energy prices and higher
energyexportswillcontinuetosupportlocalmanufacturing,attractoverseemanufacturingtotheU.S.,and
overallstrengthentheU.S.economy.
Takingallofthisintoaccount,IbelievewewillcontinuetoseeslowbutpositiveU.S.andglobaleconomic
growthoverthenextfewyears.Likewise,Ibelievethiscurrenteconomiccyclewillbestretchedoutlonger
thanhistoricnorms.Thereforepastcyclesareprobablynotagoodindicatorofthecurrentcycle.Thiscan
be translated into CAT also experiencing moderate growth for the next few years as CAT’s stock price
moveswiththeU.S.andglobaleconomiesandthefactorslistedabove.
3. IndustrialsSectorAnalysis
TheIndustrialsectorislargelycomprisedofstocksthatrelatetotheproductionanddistributionofgoods
used in construction and manufacturing. Companies in the industrials sector are involved with (but not
limited to) aerospace and defense, machinery, tools, lumber production, construction, metal fabrication,
anddistribution/shipping/transport.CATresidesinthemachineryindustry.
6www.caterpillar.com
7BloombergProfessional
8JeffriesFixedIncome,MonthlyU.S.HousingMonitor,November7,2012.
9AnneDuignan,JPMorganMachineryAnalyst,Interview,September7,2012 4 MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
Aerospace&Defense
BuildingProducts
ConstructionandEngineering
ElectricalEquipment
IndustrialsSector
IndustrialConglomerates
Machinery
TradingCompanies&Distributors
CommercialServices&Supplies
AirFreight&Couriers
Airlines
Marine
Road&Rail
10
Performanceintheindustrialssectorislargelydrivenbysupplyanddemandforbuildingconstructionand
manufactured products11. As such, the industrial sector closely tracks the U.S. and global economies; its
performance closely correlated to the S&P 500. As explained in the Economic Analysis section above, I
believe we will continue to experience economic growth, albeit slow growth. Therefore, the industrials
sectorshouldfairmoderatelywelloverthenext 2‐3years.TheIndustrialssectorcurrentlyaccountsfor
10%ofS&P500,comprisedof62companies.TheIndustrialSector’stotalmarketcapis$1.311Trillion12.
With such a diverse array of industries within the sector, there’s a great deal of flexibility in creating an
investmentstrategydependingonwhereweareintheeconomiccycle.Subsequently,industrialcompanies
haveawiderangeofbetasandperformancepatternsrelativetoeconomiccycles.
Based on historical data, the industrials sector should be mid‐cycle, approaching late cycle; however, as
mentionedabove,aswecomeoutofaverydeepglobalrecessionwithcentralbanksbeingveryaggressive
withmonetarypolicy,thiscyclewilllikelystretchoutlongerthanthehistoricnorm.Instead,Ibelievewe
arestillapproachingmid‐cycle.
PurchasingManagers
ArchitecturalBilling
Two leading indicators of industrial sector
Index(PMI)
Index(ABI)
performance,theArchitecturalBillingIndex(ABI),
9/30/2012
51.5
9/30/2012
51.6 and the Purchasing Managers Index (PMI), are
8/31/2012
49.6
8/31/2012
50.2 bothtrendingpositively.Thesearebothverygood
7/31/2012
49.8
7/31/2012
48.7 indicators for the direction of CAT’s performance
6/30/2012
49.7
6/30/2012
45.9 as CAT is a machinery manufacturer with a very
5/31/2012
53.5
5/31/2012
45.8 large part of its business dependent on the
construction industry. The ABI is a leading
4/30/2012
54.8
4/30/2012
48.4
indicator of construction activity. A score above
3/31/2012
53.4
3/31/2012
50.4 50 indicates an increase in architectural billings.
2/29/2012
52.4
2/29/2012
51.0 ConstructionactivitytypicallylagstheABIby9‐12
1/31/2012
54.1
1/31/2012
50.9 months. For the last year and a half, the ABI has
12/31/2011
53.1
12/31/2011
51.0 been hovering just above or just below 50 as
11/30/2011
52.2
11/30/2011
51.3 indicated in the ABI chart. With the two recent
scoresjustabove50,thisindicatespositivethough
10/31/2011
51.8
10/31/2011
49.4
slowconstructiongrowthinthefuture13.ThePMI
9/30/2011
52.5
9/30/2011
47.3 is an indicator of the health of the manufacturing
8/31/2011
52.5
8/31/2011
50.5 sector.Itisbasedonneworders,inventorylevels,
7/31/2011
51.4
7/31/2011
45.9 production, supplier deliveries, and the
6/30/2011
55.8
6/30/2011
46.8 employment environment. Similar to the ABI, a
score above 50 indicates an expansion of the
102012Russel2000Index
11www.investopedia.com
12S&PDowJonesIndices.www.us.spindices.com/indices/equity/sp‐500
13ArchitecturalBillingIndex,September2012 5 MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
manufacturing sector over the prior month. Excluding June, July, and August of 2012, in which the PMI
scorewasjustbelow50,thePMIindexhasbeenabove50forthelastyearandahalf14.
IndustrialSector’sperformance:
Industrialssectorreturnshavelagged
AnnualizedReturns(11/16/2012)
theS&P500inaggregateovera5‐year
1Year
3Year
5Year
periodaswellasforthelast12months;
TotalReturnsS&P
however,forthepast3‐yearperiod,the
10.20%
10.52%
‐0.13%
500Industrials
industrialssectorhasoutperformedthe
PriceReturnsS&P
S&P500.Theindustrialssectorhas
7.49%
7.93%
‐2.67%
500Industrials
alsounderperformedtheS&P500year‐
to‐date;however,recentlywiththe
TotalReturnsS&P
12.44%
9.30%
0.82%
pull‐backinglobaleconomies,the
500
industrialssectorhaslostlessthanthe
PriceReturnsS&P
S&P500;arelativelypositiveindication
9.94%
7.02%
‐1.39%
500
ofinvestorsentimenttowardsthe
sector.
DailyReturns(11/16/2012)
IndexLevel
1Day
MTD
QTD
YTD
TotalReturnsS&P
500Industrials
436.68
0.31%
‐2.79%
‐3.32%
7.54%
PriceReturnsS&P
500Industrials
307.80
0.28%
‐2.97%
‐3.60%
5.30%
TotalReturnsS&P
500
2381.02
0.49%
‐3.51%
‐5.29%
10.29%
PriceReturnsS&P
500
1359.88
0.48%
‐3.70%
‐5.61%
8.13%
14PurchasingManagersIndex,September2012
6 MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
Asillustratedinthefirstpanelofthegraphsabove,theindustrialsectorhashistoricallycloselytrackedthe
S&P500.Illustratedinthe2ndpanelofthegraphsabove,theindustrialsectorhasperformedrelativelyflat
comparedtotheS&P500,thoughwithahighdegreeofvolatility15.
Industrials
High
Low Median Current In absolute terms, Industrials Sector
multiples are trading below their 10‐year
AbsoluteBasis
historicalmedian.AstheGreatRecessionis
EV/EBITDA
12.1
7.9
10.8
9.6
priced into the median multiples and I
Price/CF
14
6
10.7
9.5
believe we have not yet hit peak in this
TrailingP/E
24
7.1
17.7
13.9
cycle, the industrials sector appears to be
ForwardP/E
20.9
9.2
16.3
13.3
undervalued.
Industrials
High
Low Median Current Relative to the S&P 500, the Industrials
RelativetoS&P
Sector multiples are trading slightly below
500
their 10‐year medians. Relative to the S&P
EV/EBITDA
1.7
1.3
1.4
1.3
500, the industrials sector appears more
Price/CF
1.2
0.8
1.1
1
fairlyvalued.
TrailingP/E
1.2
0.66
1.1
0.99
ForwardP/E
1.2
0.84
1
0.97
4. CompanyAnalysis
More than 70% of CAT’s sales occur outside of the United States. Backlog at the end of 2011, 2010, and
2009 was approximately $29.8 billion, $18.7 billion and $9.6 billion respectively16. Backlog as of 3rd
15BloombergProfessional.
162011Caterpillar10‐K 7 MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
quarter2012isat$23.1billionandfalling17.Withtheworldwidedecreaseinmininginvestmentandthe
beginningoftheconstructionseasonafewmonthsoff,backlogwillremainrelativelylowinthenear‐term.
a. Strategy
CATisacyclicalcompany,thoughmanagementhasbeenattemptingtodampencyclicalitythroughproduct
andgeographicdiversification.Earlycycleactivitytypicallyoccursinresidentialconstruction,thoughwith
the late recovery of the housing market, this could be indicative of growth in the near term for CAT.
Governmentspendingonroadandhighwayconstructionalsotypicallyoccursearlyinthecycle;however
withtheU.S.passingthe$105billionhighwayandinfrastructurebillinJuly,2012,andChinaannouncinga
$158 billion infrastructure stimulus package in September, 2012, this could also provide growth
opportunitiesforCAToverthenextcoupleofyears.Miningactivitytypicallyoccursmid‐latecycleandis
expectedtoslowdownthrough2014beforepickingupagain.Engineactivitytypicallyoccurslatecycle.
CAT’s services and aftermarket business help to smooth out volatility throughout the economic cycle18.
Relative to economic activity and CAT business activity, if we were to analyze this cycle starting at this
pointintime,itappearstomimictheearlypartofacyclecomingoutofamildrecession.
With the acquisition of Bucyrus in 2010, one of the world’s largest underground mining machinery
manufacturers,thiscurrentcycleforCATcouldbelessvolatilethanpastcycles.This,coupledwithwhat
maybeanextendedeconomiccyclecouldmakethiscycleforCATaveryuniqueone,anddifficulttopredict
basedonpastcycles.Theresourcesindustriessegmentrevenuesincreasedby$7.2billionfrom2010to
2011withtheBucyrusacquisition,a16.4%increaseinoverallrevenuesfromthisacquisitionalone19.
Much of CAT’s global expansion occurs through acquisitions as well as through organic growth. The
primary drivers of CAT’s organic growth and acquisition targets are through construction machinery,
mining machinery, and associated aftermarket services. Throughout the world, CAT sells its products to
CAT dealerships who in turn sell to construction contractors and machinery and equipment rental
companies. CAT continues building its distribution network throughout the world, often leveraging the
existing dealership networks inherited through acquired companies, and strategically locating dealers in
the right places. This is an ongoing process and one which is extremely important to CAT’s aftermarket
service business. As such, CAT revenues are also driven by its high margin aftermarket services which
providesupportformachinerythroughmaintenance,parts,andtechnicalsupport20.
b. CompetitiveAnalysis
PortersFiveForces+ComplementaryProducts+Government/Regulation
IntensityofCompetition
MODERATE – CAT competes on a global scale with a small number of global competitors. However,
intensity of competition may increase as Chinese construction equipment manufacturers expand
internationallyandentertheglobalarena;namelySanyHeavyIndustriesandLuiGong.
17WallStreetJournal.www.wsj.com
18MacquarieCapital(USA),December2010
19
2011 Caterpillar 10‐K 20AnneDuignan,JPMorganMachineryAnalyst,Interview,September7,2012 8 MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
ThreatofNewEntrants
LOW–Achievingscaleandwinningordersfromglobalcompaniesisunlikelyfromanewentrant,though
possibleasbeingprovenbysomeChineseconstructionequipmentmanufacturers.
BargainingPowerofBuyers
MODERATE – Globally, CAT’s customers are generally large and have buying power, but the technology
required to meet customers’ needs can only be met by a limited number of heavy machinery
manufacturers.
BargainingPowerofSuppliers
LOW–CAThasbeenactivelycuttingitssupplierbasefromapeakof10,000tobelow5,000asof2012.
ThreatofSubstituteProducts
LOW–Manuallaborinsomeeconomiesmaybeanoption.
ImportanceofComplementaryProducts
HIGH–Serviceandsupporttoensuremachineuptimeisimportant.CATdealersstockover80%ofparts
neededandareabletofulfillaround98%ofneedswithin24hours.ThisisimportanttoCAT’saftermarket
business.
Government&PressureGroups
HIGH – Caterpillar’s most important end market is roadway construction which is fueled by government
legislation21.IntheU.S.,congressrecentlypassedthe$105billionHighwayandInfrastructureBillandin
China,theChinesegovernmentrecentlyannounceda$158billioninfrastructurestimuluspackage.
c. CompetitiveLandscape
CAT’s largest competitors globally for construction and mining machinery are Komatsu, Hitachi, Volvo
HeavyMachinery,andSanyforconstructionmachinery;andJoyGlobalforminingmachinery.Thefigure
below shows the global market share for construction machinery sales among construction machinery
manufacturers.CAThasthelargestglobalmarketshareat15.1%
212010STRSResearch
9 MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
The Asia Pacific region presents the greatest regional opportunity for CAT but is an increasingly
competitivemarketthatisstartingtospillintothelargerglobalcompetitivestage.TheAsiaPacificregion
isthehighestgrowthregionintheworldforconstructionandminingmachinery,currentlyaccountingfor
48%ofconstructionmachinerysales.Assuch,globalcompetitioninconstructionandminingmachinery
salesareheavilyconcentratedintheAsiaPacificregion.China,mostnotably,hasbeendrivingconstruction
equipmentsales22andisexpectedtoincreasinglydriveminingmachinerysales.
OneofthemostimportantreasonsforCATtoexpandintoChinaistolearnhowtoworkwithandcompete
against Chinese heavy machinery manufacturers on their own turf to be better positioned to compete
againstthemgloballyandwhentheyexpandintotheU.S.MarketshareinChinaissecondaryandCATis
more likely to lose market share in China rather than gain regarding construction machinery23, however
revenuesarestillexpectedtogrowastheChineseconstructionmachineryindustrycontinuestoexpand.
Komatsu,Hitachi,andVolvohavetraditionallybeenCAT’slargestcompetitorsinAsia(KomatsuandSany
lead CAT in market share for heavy machinery in the Asia Pacific region) and three of CAT’s largest
competitors globally; however the emergence of Chinese construction machinery manufacturers, most
notably Sany Heavy Industries and LuiGong, are making the competitive landscape even more
challenging24. These Chinese machinery manufacturers are no longer concentrating their businesses
domestically, but aggressively expanding regionally and globally. Sany for instance recently acquired
Putzmeister,aGermanmanufacturerofhigh‐techconcretepumps.Thisisanexampleofhowtheup‐and‐
coming Chinese construction machinery manufacturers are rapidly acquiring technology in addition to
expandingtheirglobalreach25.Becauseofthisacquisition,SanyHeavyIndustrieshasleapfroggedHitachi
intotheNo.4spotforglobalmarketshareofconstructionmachinerysales26.
Though China is the largest construction site in the world as well as the biggest driver for construction
machinery sales, CAT sales in China only account for 5% of CAT’s total sales. However, the Asia Pacific
marketaccountsfor30%ofCATsales.ThetwoconstructionmachineryproductsthatdrivemostofCAT’s
22InternationalStrategyandInvestmentGroup.IndustrialResearch:Machinery.DavidRaso.
23AnneDuignan,JPMorganMachineryAnalyst,Interview,September14,2012
24InternationalStrategyandInvestmentGroup.IndustrialResearch:Machinery.DavidRaso.
25China’sSanytoacquirePutzmeister.AccessedSeptember7,2012.
http://www.ft.com/cms/s/0/7aecad0a‐4a5e‐11e1‐a11e‐00144feabdc0.html#axzz28XeZo4dX
26InternationalStrategyandInvestmentGroup.IndustrialResearch:Machinery.DavidRaso.
10 MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
business in the Asia Pacific are wheeled loaders and hydraulic excavators; the construction machines in
highestdemand.CATcurrentlymanufacturesmostlyconstructionmachineryinChina27.Thiswillchange
soonasCATacquiresERAMining Machinery,aChineseundergroundminingmachinerymanufacturer to
be discussed in more detail below. There are currently 16 CAT manufacturing plants in China.
Additionally, there are 3 research and development centers, 6 office branches, and 3 logistics and parts
centers28.
CAT currently enjoys the largest global market share among construction machinery manufacturers at
15.1%.TheAsiaPacificregionmakesup48%oftheconstructionmachinerymarketfornewsales.China
comprises68.1%oftheAsiapacificconstructionmachinerymarket.Therefore,Chinamakesup32.7%of
the global construction machinery market. Both the Asia Pacific construction machinery market and
China’sshareofthatmarketaregrowingfasterthananyotherregionoftheworld29.CAT’smarketshareof
construction machinery sales (9.2%) in the Asia Pacific region is third behind Komatsu (13.3%) and the
Chineseconstructionmachinerymanufacturingcompany,Sany(9.3%).
TheAsiaPacificregionisalreadyveryimportanttoCATregardingminingmachinerysales;howeveritwill
become more important soon as CAT gains a greater foothold in the mining machinery manufacturing
marketinChina.
MiningmachinerypresentsthelargestbusinessopportunityforCATtoexpandsalesglobally,especiallyin
theAsiaPacificRegion;mostnotablyinChina.Theglobalminingmachineryindustryisexpectedtogrow
toa$92billionindustryby2015.Itisapproximatelya$61billionindustrycurrently.TheChinesemarket
isexpectedtomakeup57%oftheminingmachineryindustry30.
Withtherecent2010acquisitionofBucyrusInternational,CAT’sonlymajorglobalcompetitionregarding
miningmachineryisJoyGlobalwhosehighestsellingproductiselectricshovels.Globaldemandforelectric
shovels is declining as mining companies are increasingly adopting hydraulic shovels, which CAT
manufactures. This is one of the strategic advantages CAT has relative to its largest mining machinery
competitor.
The largest issue regarding mining has been the recent decrease in mining investment around the world
which is expected to continue to slow through 2014, especially in Australia. This will have negative
implicationsforCATminingmachinerysalesintheAsiaPacificregionintheshort‐term.Alargepartofthe
recent mining boom has been a result of China’s consumption of natural resource. With China’s future
growth uncertain, and the possibility that its future growth will not be as resource intensive, the flow
throughtominingmachinerysalescouldnegativelyimpactCATsalesthrough201431;however,withthe
acquisitionofERAMiningMachinery,CATwillgainminingmachinerymarketshareinChina.
CATandJoyGlobalareinaracetoacquireChineseminingmachinerymanufacturerstogainafootholdand
expand operations into China. CAT is in the process of completing the acquisition of ERA Mining
Machinery, while last year, Joy Global acquired International Mining Machinery, another Chinese mining
27AnneDuignan,JPMorganMachineryAnalyst,Interview,September7,2012 28www.china.cat.com
29InternationalStrategyandInvestmentGroup.IndustrialResearch:Machinery.DavidRaso.
30AnneDuignan,JPMorganMachineryAnalyst,Interview,September14,2012
31“Miningboomtopeak,slowdownahead–DeloitteAccess”.AccessedOctober7th,2012.
http://www.mineweb.com/mineweb/view/mineweb/en/page67?oid=155550&sn=Detail
11 MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
machinerymanufacturer.TheMinistryofCommerceinChinarecentlygaveitsapprovalforCATtomove
forwardwiththecompleteacquisitionofERA32.
As competition in construction machinery increases globally, in the Asia Pacific region and in China
especially,miningmachinerypresentsanenormousopportunityforCAT’scontinuedgrowthasithasmuch
less competition and a competitive advantage in scale, product offering, and technology over its next
largestminingmachinerycompetitor,JoyGlobal.
d. ThirdQuarterEarningsResults
CAT beat earnings at $2.54 versus consensus of $2.22. Revenues reported were in line at $16.5 billion
versus consensus of 16.7 billion. CAT experienced the highest sales and profit in 3rd quarter history. A
portionoftheirgainscamefromthesaleoftheirlogisticsdivisionandlessfromtheBucyrusacquisition
from2010.Despitethis,CATloweredrevenueguidanceto$66billionfrom$68‐$70billionaswellasEPS
guidanceto$9.25from$9.60for2012.Thetwomaindriversbehindloweringguidancearehighinventory
levelsandaslow‐downinthesaleofminingmachineryduetodeclininginvestmentintheminingindustry.
Inventorylevelshavebeenelevatedduetoarecentlackofdemandfrompurchasersofconstructionand
miningmachinery.CATdealershipshavenotbeenabletoadequatelyreducetheirinventorylevelsthrough
salesandhavethereforeslowedtheirpurchasingofequipmentandmachineryfromCAT.Asaresult,CAT
has reduced production of its machinery to the tune of $3.0 billion through the end of 2012 and will
continuethisreductioninproductionintothefirstquarterof2013untilinventoriescomedowntonormal
levels. Once demand begins to outstrip supply and dealerships begin ordering machinery in larger
quantitiesfromCAT,CATwillthenincreaseproductiononceagain.Thisisnotexpectedtooccuruntil2nd
quarter of 2013 when construction machinery sales pick up due to the beginning of the construction
season.
Miningactivityisexpectedtoslowdownthrough2014andapproaching2015.Caterpillarexpectsmining
machinerysalestodecreaseby5‐10%overthatsametimeperiod.Theyalsoexpectthislossinsalestobe
offset by construction machinery sales, largely driven by a strengthening construction industry in the
United States and continued construction activity in emerging markets such as China and Brazil. CAT
managementdoesnotexpecteconomicgrowthuntilhalfwaythrough2013.
Despitesomeheadwinds,CATmanagementhasapositiveoutlookfor2013andexpectsCATtobe“steady
asshegoes”in2013withslowgrowth,butgrowthnonetheless33.Inthemeantime,CATstockisdepressed
andwilllikelystarttoexperienceafairlysignificantupsideintothe2ndand3rdquartersof2013.
32“CaterpillartobuyChinaminingmachinerygroup”.AccessedSeptember8th,2012.
http://www.ft.com/cms/s/0/00c93a62‐0bfb‐11e1‐9310‐00144feabdc0.html#axzz28dV20KEl 33CaterpillarInc.3Q2012EarningsRelease&Caterpillar3QEarningsCall
12 MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
e. TrendAnalysis:
CAT10YearPerformance
34
CAThasseenpositivegrowthoverthelastdecade,thoughtheyhaveexperiencedagreatdealofvolatility.
AstheycloselytracktheU.S.andglobaleconomies,whentheGreatRecessionhit,CATplungedtolevelsnot
seensince2001;however,sincethe beginningoftherecovery,CAThasoutperformedatadramaticrate
throughthe1stquarterof2012.Duetotheeconomicuncertaintywithfirst,theU.S.presidentialelection,
nowthefiscalcliff,andslowingglobaleconomies,amongsomelessermacrofactors,CAThaslargelybeen
tradingflatsincethe2ndquarterof2012.AsIbelievethiswillbeaprolongedcycle,andthiscurrentpull‐
backinglobaleconomiesislikelyahiccupbeforewemoveupagain,CATappearstobeunderpriced.
34BloombergProfessional
13 MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
CATvs.S&P500
As illustrated in the graphs above, CAT has outperformed the S&P 500 the majority of the time over the
pastfiveyears.StartingaroundthebeginningofMarch,2012,CAThasunderperformedtheS&P500on
newsofadeclineininvestmentintheminingindustryaswellasageneralslowdowninworldeconomies.
CATiscurrentlynearingits52‐weeklowof$78.25.AsofFriday,November16th,2012,CATisat$81.93.
CATvs.S&P500IndustrialsSector
14 MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
As the Industrials Sector closely tracks the S&P 500, CAT’s performance versus the S&P 500 industrials
indextellsmuchthesamestoryasCAT’sperformanceversustheS&P500above,thoughwithinathinner
spread.Again,IbelievethisisindicativeofCATbeingundervaluedratherthanonthedownsideofitscycle.
f. EquityValuation:ComparativeMultiplies
i.
AbsoluteValuation
Absolute
High
Low Median Current In absolute terms, CAT is currently trading
below its 10‐year historic median. Given the
Basis
trends above, this could be due to CAT
EV/EBITDA
18.3
7.7
11.2
7.7
underperforming the S&P 500 and/or many
Price/CF
13.2
2.8
9.7
6.3
investors may view CAT as already coming off
TrailingP/E
31
4.4
15.9
9.1
its peak in the cycle. I believe we are
ForwardP/E
40.1
7.3
13.3
10.5
experiencing a lull before we continue
economicgrowthandthereforeCATseemstobeundervalued.
ii.
RelativeValuation:CATvs.S&P500,IndustrialSector,andMachineryIndustry
Relative to High
Low
Median Current Predictably, with the S&P 500 and S&P 500
S&P500
Industrials index outperforming CAT since
March,2012,CATmultiplesarebelowtheir10‐
EV/EBITDA
2.2
1.1
1.7
1.1
yearhistoricmedians.Again,asIbelieveglobal
Price/CF
1.4
0.4
0.9
0.7
economies will pick up again rather than
TrailingP/E 2.1
0.41
0.97
0.66
continue downward in the short term, these
ForwardP/E 2.6
0.61
0.89
0.78
ratios seem to indicate that CAT is currently
Relative to High
Low
Median Current undervalued.
Industrials
EV/EBITDA
1.7
0.8
1.1
0.8
Price/CF
1.3
0.5
0.9
0.6
TrailingP/E 1.8
0.6
0.9
0.7
ForwardP/E 2.4
0.6
0.9
0.8
Relative to High
Low
Median Current Machinery
Price/EBITDA 1.31
0.85
1.02
0.88
Price/CF
1.3
0.5
0.9
0.8
TrailingP/E 1.1
0.81
0.96
0.89
ForwardP/E 1.5
0.74
0.98
0.96
15 MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
5. SummaryandRecommendations
MyrecommendationistoBUYCAT.
Opportunities
 ContinuedU.S.andglobalGDPgrowth
 Emergingmarkets(especiallyAsia‐Pacific)
andanexpandingmiddleclass



Risks
SlowingU.S.andglobalGDPgrowth
WorseningofEuropeanSovereignDebt
Crisis
Newtechnologydemandsasemissions
standardsandenvironmentalregulations
areraised
U.S.,Chinese,andotheremergingmarket
constructionintheshortterm

Slowdowninemergingmarketeconomies
suchasChina,India,andBrazil

EconomicVolatility

Mininginthelong‐term



U.S.housingmarket
Domesticenergyproduction

Decreaseinminingindustryinvestmentin
theshortterm
Highinventorylevels

JustificationtoBUYCAT:
 DCFAnalysis–CATisundervaluedwithanUpsideof26%andtargetpriceof$103.
 MultiplesAnalysis–CATappearsundervalued
 PurchasingManagersIndex(PMI)scoreshaveapositivetrend,monthlyscores>50
 ArchitecturalBillingIndex(ABI)scoreshavebeguntrendingpositivelyagain,monthlyscores>50
 CAT will not likely see much of a sustainable improvement in price for a few months; however I
believeCATwillexperiencesignificantgainsintothe2ndand3rdquartersof2013.Factorsinclude:
o Recent slow‐down in global economies. CAT stock price moves with U.S. and Global
economies.
o Equipment purchases for construction season will not pick up again until February time‐
frame.
o FiscalCliffuncertaintywillcontributetokeepingCATstockpriceatdepressedlevels.
o Slow‐downinmininginvestmentintheshortterm.
o Inventory levels are currently abnormally high though are expected to be right‐sized into
the2ndquarterof2013.
o Volatilityduetothemacroenvironment.
 U.S.,Chinese,andotheremergingmarketconstructionoutlooksaregoodintheshort‐term.
 Miningoutlookisgreatlong‐term,thoughlaggingintheshortshort‐term.
16 MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
6. Appendix
a. IncomeStatementForecast
CAT
(mill$)
Revenue
Concensus
Guidance
Operating Costs:
COGS
SG&A
R&D
Interest expense of financial products
Other operating (income) expenses
Total
FY
2014E
76,378.3
69,959.6
FY
2013E
71,673.0
65,393.3
FY
2012E
66,400.8
65,566.7
66,000.0
2Q12
17,374.0
1Q12
15,981.0
FY
2011
60,138.0
FY
2010
42,588.0
FY
2009
32,396.0
FY
2008
51,324.0
FY
2007
44,958.0
FY
2006
41,517.0
11,639.0 12,280.0
1,471.0
1,517.0
634.0
632.0
197.0
198.0
(92.0)
131.0
13,849.0 14,758.0
11,237.0
1,340.0
587.0
204.0
290.0
13,658.0
43,578.0
5,203.0
2,297.0
826.0
1,081.0
52,985.0
30,367.0
4,248.0
1,905.0
914.0
1,191.0
38,625.0
23,886.0
3,645.0
1,421.0
1,045.0
1,822.0
31,819.0
38,415.0
4,399.0
1,728.0
1,153.0
1,181.0
46,876.0
32,626.0
3,821.0
1,404.0
1,132.0
1,054.0
40,037.0
29,549.0
3,706.0
1,347.0
1,023.0
971.0
36,596.0
2,616.0
2,323.0
7,153.0
3,963.0
577.0
4,448.0
4,921.0
4,921.0
110.0
70.0
113.0
88.0
343.0
130.0
389.0
381.0
274.0
299.0
288.0
320.0
274.0
214.0
3Q12
16,445.0
0.0
0.0
0.0
10,114.6
9,941.5
9,172.0
8,787.7
9,879.5
8,970.2
504.1
381.9
473.0
358.4
438.2
332.0
Consolidated profit before taxes
9,992.4
9,057.4
9,773.3
2,450.0
2,576.0
2,298.0
6,725.0
3,750.0
569.0
4,473.0
4,953.0
4,861.0
Provision (benefit) for income taxes
Profit of consolidated companies
3,197.6
6,794.8
2,898.4
6,159.0
3,127.5
6,645.8
753.0
1,697.0
872.0
1,704.0
689.0
1,609.0
1,720.0
5,005.0
968.0
2,782.0
(270.0)
839.0
953.0
3,520.0
1,485.0
3,468.0
1,405.0
3,456.0
15.3
14.3
13.3
5.0
5.0
2.0
(12.0)
37.0
73.0
81.0
Profit of consolidated and affiliated comp
6,810.1
6,173.3
6,659.1
1,702.0
1,709.0
1,611.0
4,981.0
2,758.0
3,557.0
3,541.0
3,537.0
Less: Profit (loss) attributable to noncontrollin
76.4
71.7
66.4
3.0
10.0
25.0
53.0
58.0
0.0
0.0
0.0
6,733.7
6,101.7
6,592.7
1,699.0
1,699.0
1,586.0
4,928.0
2,700.0
895.0
3,557.0
3,541.0
3,537.0
Basic Shares
Diluted Shares
653.6
668.7
653.6
668.7
653.6
668.7
653.6
668.7
652.9
669.6
650.0
670.2
645.0
666.1
631.5
650.4
615.2
626.0
610.5
627.9
638.2
659.5
658.7
683.8
Basic EPS
Diluted EPS
Concensus
Guidance
10.3
10.1
10.0
9.3
9.1
8.8
2.6
2.5
2.6
2.5
2.4
2.4
7.6
7.4
4.3
4.2
1.5
1.4
5.8
5.7
5.5
5.4
5.4
5.2
Incremental Sales Growth
4,705.2
5,272.3
10.1
9.9
9.1
9.0-9.25
9.13
6,262.8
729.0
3,144.0
3,032.0
17,550.0
6,366.0
3,441.0
5,178.0
D&A
% of Sales
3,207.9
4.2%
3,010.3
4.2%
2,788.8
4.2%
720.0
4.4%
689.0
4.0%
661.0
4.1%
2,527.0
4.2%
2,296.0
5.4%
2,336.0
7.2%
1,980.0
3.9%
1,797.0
4.0%
1,602.0
3.9%
CapEx
% of Sales
4,582.7
6.0%
4,658.7
6.5%
4,648.1
7.0%
1,231.0
7.5%
1,166.0
6.7%
1,129.0
7.1%
3,924.0
6.5%
2,586.0
6.1%
2,472.0
7.6%
4,011.0
7.8%
3,040.0
6.8%
2,675.0
6.4%
26,732.4
35.0%
19,094.6
25.0%
9165.4
12.0%
-1541.8
-32.8%
25,085.6
35.0%
18,635.0
26.0%
8600.8
12.0%
-5903.4
-112.0%
19,920.2
30.0%
17,928.2
27.0%
8632.1
13.0%
-4880.3
-77.9%
Effective Tax Rate
32.0%
32.0%
32.0%
30.7%
33.9%
30.0%
25.6%
25.8%
-47.5%
21.3%
30.0%
28.9%
Interest expense excluding financial products
Other income (expense)
0.66%
0.50%
0.66%
0.50%
0.66%
0.50%
0.78%
-0.10%
0.63%
0.40%
0.71%
0.55%
0.66%
-0.05%
0.81%
0.31%
1.20%
1.18%
0.53%
0.58%
0.64%
0.71%
0.66%
0.52%
Equity in profit (loss) of unconsolidated affiliate
0.02%
0.02%
0.02%
0.03%
0.03%
0.01%
-0.04%
-0.06%
-0.04%
0.07%
0.16%
0.20%
Less: Profit (loss) attributable to noncontrollin
0.10%
0.10%
0.10%
0.02%
0.06%
0.16%
0.09%
0.14%
-0.21%
0.00%
0.00%
0.00%
Operating Profit
Concensus
Guidance
Interest expense excluding financial products
Other income (expense)
Equity in profit (loss) of unconsolidated affiliate
Profit
Receivables
% of Sales
Inventory
% of Sales
Payables
% of Sales
Change in WC
Incremental Working Capital Change per %
of Sales Growth
2,596.0
129.0
(17.0)
(24.0)
(24.0)
827.0
(68.0)
10,192.0 (18,928.0)
18,679.0 18,826.0 18,301.0 17,953.0 16,792.0 13,912.0 18,128.0 15,752.0 15,411.0
113.6%
108.4%
114.5%
29.9%
39.4%
42.9%
35.3%
35.0%
37.1%
17,550.0 17,344.0 16,511.0 14,544.0
6,360.0
8,781.0
7,204.0
6,351.0
9,587.0
106.7%
99.8%
103.3%
24.2%
22.5%
19.6%
17.1%
16.0%
15.3%
7978.0
8470.0
8360.0
8161.0
5856.0
2993.0
4827.0
4723.0
4085.0
48.5%
48.8%
52.3%
13.6%
13.8%
9.2%
9.4%
10.5%
9.8%
17 396.0
(32.0)
MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
b. BusinessSegmentForecast
CAT
(mill$)
Revenue:
Machinery and Power Systems
Power Systems
Resource Industries
Construction Industries
All Other Segments
Corporate Items and Elimina
Financial Products
Financial Products
Corporate Items and Elimina
Total
Concensus
Guidance
FY
2014E
FY
2012E
FY
2010
1Q12
5,317.0
5,214.0
4,904.0
318.0
(14.0)
5,511.0
5,390.0
5,340.0
454.0
(11.0)
4,987.0
4,778.0
5,062.0
474.0
(13.0)
20,114.0 15,537.0 13,389.0
19,667.0 13,572.0
8,507.0
15,629.0
8,667.0
5,857.0
2,021.0
2,156.0
1,791.0
(39.0)
(65.0)
(4.0)
776.0
764.0
761.0
(70.0)
(74.0)
(68.0)
16,445.0 17,374.0 15,981.0
3,003.0
2,946.0
3,139.0
(257.0)
(225.0)
(283.0)
60,138.0 42,588.0 32,396.0
21,723.1
23,600.4
16,410.5
1,899.7
(39.0)
3,140.1
(257.0)
76,378.3
70,991.0
3,109.0
(257.0)
71,673.0
65,588.0
3,063.1
(257.0)
66,400.8
65,795.0
66,000.0
3,683.4
2,114.6
1,792.0
835.9
3,367.1
3,304.1
1,641.0
816.9
943.0
1,113.0
459.0
482.0
(512.0)
982.0
1,426.0
688.0
188.0
(778.0)
812.0
1,168.0
616.0
218.0
(617.0)
746.2
750.4
9,172.0
8,787.7
9,879.5
8,970.2
190.0
(9.0)
(70.0)
2,596.0
188.0
(4.0)
(74.0)
2,616.0
205.0
(11.0)
(68.0)
2,323.0
587.0
(4.0)
(253.0)
7,153.0
429.0
(42.0)
(211.0)
3,963.0
3,053.0
2,288.0
1,660.0
3,334.0
1,789.0
288.0
2,056.0
783.0
(768.0)
837.0
720.0
625.0
(2,457.0) (1,793.0) (1,348.0)
8.0%
8.0%
4.0%
0.0%
8.0%
12.0%
4.0%
0.0%
8.0%
20.0%
5.0%
-6.0%
4.8%
13.4%
0.1%
-31.0%
16.7%
12.1%
68.1%
8.1%
-4.4%
120.0%
12.1%
72.6%
13.2%
-19.5%
0.0%
29.5%
44.9%
80.3%
-6.3%
-40.0%
16.0%
59.5%
48.0%
20.4%
1525.0%
1.0%
1.5%
2.0%
6.6%
7.9%
10.4%
2.5%
9.4%
4.6%
0.0%
7.2%
22.1%
4.2%
17.2%
23.4%
1.9%
14.2%
41.2%
-6.1%
-20.5%
31.5%
15.8%
0.1%
9.0%
1.0%
11.0%
0.5%
44.0%
0.0%
15.7%
0.2%
8.0%
-6.0%
10.5%
0.5%
44.0%
1.0%
15.5%
0.3%
14.0%
-3.0%
10.0%
-3.2%
43.0%
1.6%
17.7%
2.1%
21.3%
5.1%
9.4%
-0.8%
151.6%
100.8%
17.8%
2.9%
26.5%
1.6%
12.9%
3.1%
41.4%
15.7%
16.3%
0.5%
24.4%
-4.3%
12.2%
0.0%
46.0%
4.4%
15.2%
0.5%
17.0%
3.8%
13.2%
4.1%
41.4%
8.0%
14.7%
2.3%
13.2%
9.8%
9.0%
22.1%
33.4%
-1.5%
24.0%
0.0%
13.2%
24.0%
-0.5%
12.8%
24.5%
5.0%
14.9%
24.5%
5.3%
15.8%
24.6%
2.1%
15.1%
26.9%
8.3%
14.5%
19.5%
5.0%
11.9%
14.6%
1.9%
9.3%
18 FY
2009
2Q12
23,461.0
26,432.4
17,066.9
1,899.7
(39.0)
Revenue Growth YoY
Machinery and Power Systems
Power Systems
Resource Industries
Construction Industries
All Other Segments
Corporate Items and Eliminations
Financial Products
Financial Products
Corporate Items and Eliminations
Total
FY
2011
3Q12
25,337.8
28,547.0
17,749.5
1,899.7
(39.0)
Operating Income
Machinery and Power Systems
Power Systems
4,003.4
Resource Industries
2,569.2
Construction Industries
1,952.4
All Other Segments
835.9
Corporate Items and Eliminations
Financial Products
Financial Products
753.6
Corporate Items and Eliminations
Adjustments
Total
10,114.6
Concensus
9,941.5
Guidance
Operating Income
Machinery and Power Systems
Power Systems
Chg YoY
Resource Industries
Chg YoY
Construction Industries
Chg YoY
All Other Segments
Chg YoY
Financial Products
Financial Products
Chg YoY
Total
FY
2013E
399.0
(18.0)
(261.0)
577.0
12.4%
3.4%
-13.1%
34.9%
12.7%
1.8% MatthewJ.Anderson
(614)940‐2290
anderson.1110@osu.edu
FisherCollegeofBusinessEquityResearch
November20,2012
CaterpillarInc.(CAT)‐BUY
c. DiscountedCashFlowsValuation
Caterpillar Inc. (CAT)
Matthew Anderson
11/16/2012
10.5%
3.0%
2013E
2014E
2015E
2016E
66,401
71,673
7.9%
76,378
6.6%
81,392
6.6%
88,718
9.0%
95,815 102,522 108,674 113,564 117,539 121,065
8.0%
7.0%
6.0%
4.5%
3.5%
3.0%
Operating Income
Operating Margin
9,880
14.9%
9,172
12.8%
10,115
13.2%
10,581
13.0%
11,090
12.5%
11,498
12.0%
11,790
11.5%
11,954
11.0%
11,924
10.5%
11,166
9.5%
10,291
8.5%
Interest and Other
Interest % of Sales
770
1.2%
831
1.2%
886
1.2%
944
1.2%
1,029
1.2%
1,111
1.2%
1,189
1.2%
1,261
1.2%
1,317
1.2%
1,363
1.2%
1,404
1.2%
Taxes
Tax Rate
3,127
32.0%
2,898
32.0%
3,198
32.0%
3,688
32.0%
3,878
32.0%
4,035
32.0%
4,153
32.0%
4,229
32.0%
4,237
32.0%
4,009
32.0%
3,742
32.0%
Net Income
% Growth
6,593
6,102
(0.07)
6,734
0.10
7,837
0.16
8,241
0.05
8,574
0.04
8,826
0.03
8,986
0.02
9,004
0.00
8,520
(0.05)
7,952
(0.07)
2,789
4.2%
(4,880)
-7.3%
4,648
7.0%
3,010
4.2%
(5,903)
-8.2%
4,659
6.5%
3,208
4.2%
(1,542)
-2.0%
4,583
6.0%
3,418
4.2%
(1,753)
-2.2%
4,721
5.8%
3,726
4.2%
(2,619)
-3.0%
4,968
5.6%
4,024
4.2%
(2,514)
-2.6%
5,174
5.4%
4,306
4.2%
(2,354)
-2.3%
5,331
5.2%
4,564
4.2%
(2,139)
-2.0%
5,434
5.0%
4,770
4.2%
(1,676)
-1.5%
5,451
4.8%
4,937
4.2%
(1,349)
-1.1%
5,172
4.4%
5,085
4.2%
(1,191)
-1.0%
5,085
4.2%
2,820
1,148
-59.3%
4,496
291.6%
5,554
23.5%
5,533
-0.4%
6,017
8.8%
6,483
7.7%
6,919
6.7%
7,384
6.7%
7,530
2.0%
7,286
-3.2%
Revenue
% Growth
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
% Growth
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
2012E
32,273
36,865
69,139
5.15%
8.3
10.5
7.0
8.2
$ 81.93
$ 103.39
26.2%
39,852
Cash
5,689
Cash/share
8.51
Total Assets
90,541
Debt/assets
2018E
2019E
2020E
2021E
Terminal Value 100,055
Free Cash Yield
9.0
11.3
7.3
8.5
2022E
8.1
10.3
6.7
7.8
7.28%
Terminal P/E
12.6
Terminal EV/EBITDA
8.7
669
Debt
Incremental Working Capital
Change per % of Sales Growth
2017E
47%
53%
100%
Terminal Growth Rate
Year
Terminal Discount Rate =
Terminal FCF Growth =
Terminal Discount Rate
9.5%
10.0%
10.5%
11.0%
106.57
99.66
93.54
88.06
110.58
103.06
96.43
90.55
115.17
106.91
99.70
93.33
103.3925
1.5%
2.0%
2.5%
3.0%
9.0%
114.41
119.19
124.70
11.5%
83.14
85.29
87.69
12.0%
78.70
80.57
82.64
131.13
120.46
111.31
103.39
96.47
90.36
84.94
3.5%
138.73
126.63
116.39
107.62
100.02
93.37
87.50
4.0%
147.85
133.92
122.31
112.49
104.07
96.78
90.39
4.5%
159.00
142.68
129.32
118.18
108.75
100.67
93.67
26.2%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
9.0%
39.6%
45.5%
52.2%
60.1%
69.3%
80.5%
94.1%
9.5%
30.1%
35.0%
40.6%
47.0%
54.6%
63.5%
74.1%
Upside/Downside
10.0%
10.5%
21.6%
14.2%
25.8%
17.7%
30.5%
21.7%
35.9%
26.2%
42.1%
31.4%
49.3%
37.3%
57.8%
44.2%
11.0%
7.5%
10.5%
13.9%
17.7%
22.1%
27.0%
32.7%
11.5%
1.5%
4.1%
7.0%
10.3%
14.0%
18.1%
22.9%
12.0%
-3.9%
-1.7%
0.9%
3.7%
6.8%
10.3%
14.3%
44.0%
32.8%
Accordingtothesensitivityanalysis,CAThasafairamountofupsideinthemajorityofscenarios.The
currentstockpriceimpliesthatCATisinexpensiverightnow.
19