11/25/2013
Industrial
Caterpillar
Ticker: CAT
Current Price: $83.00
Key Statistics
52 Week Price Range
50-Day M oving Average
Investment Thesis
83.50 - 84.11
1.35
Dividend Yield
2.40%
M arket Capitalization
54.36B
3-Year Revenue CAGR
26.60%

Given the cyclical nature of this stock, I believe that underlying
financial strength and the ability to generate positive cash flow
is more important than near-term earnings or EPS.

China’s global share is construction industry forecast to rise
from 18 percent today to 26 percent in 2025 as a result of
increased urbanization and a growing middle class.

US construction markets are expected to experience
improving conditions over the next five years, as both
residential and nonresidential markets rebound as a result of
increasing consumer and business sentiment translating to
greater investment.

Low interest rates and improved consumer outlook, caused by
declining unemployment and rising household disposable
income, are expected to precipitate greater demand for
housing.
Trading Statistics
Average Volume (3-M onth)
Institutional Ownership
Insider Ownership
EV/EBITDA (LTM )
Price Target: $91.59
79.49 - 99.70
Estimated Beta
Diluted Shares Outstanding
Recommendation: Hold
647.6
5,060,770
64%
1%
8.51
Margins and Ratios
Gross M argin (LTM )
33.09%
EBITDA M argin (LTM )
17.84%
Net M argin (LTM )
Debt to Enterprise Value
6.08%
45.45%
Covering Analysts: Guoyi Chen
Name
1
University of Oregon Investment
Group
University of Oregon Investment Group
11/25/2013
Business Overview
General Overview
Caterpillar Inc. is the world’s leading manufacturer that designs,
manufactures, markets and sells construction and mining
equipment, diesel and natural gas engines, industrial gas turbines
and diesel-electric locomotives via a worldwide dealer network. In
addition, Caterpillar Inc. also provides financial products to its
customers through Caterpillar Financial Services Corporation (Cat
Financial). The company originally organized as Caterpillar Tractor
Co. in 1925 in the State of California and reorganized as Caterpillar
Inc. in 1986 in the State of Delaware. Currently, Caterpillar Inc.
operates in 2 primary segments: Machinery and Power System
(M&PS) and Financial Products. Machinery and Power System
consists of Construction Industries, Resource Industries, Power
Systems and all other segment. Financial Products includes the
Company’s Financial Products Segment. This category includes Cat
Financial, Caterpillar Insurance Holding Inc. and their respective
subsidiaries. By the end of 2012, its 2 main businesses generated
65.8 billion dollars, but have been hit hard by decreasing in
customer demand, especially in mining industry.
Construction Industries: 29%
Sales Comparison Construction Industries
$6,000.00
$4,000.00
$2,000.00
$1Q
2Q
2012
3Q
2013
4Q
The Construction Industries is responsible for supporting customers
using machinery in infrastructure and building construction
applications. Responsibilities include business strategy, product
design, product management and development, manufacturing,
marketing and sales and product support. Sales made in this
segment have been increased stably from 2009 to 2011 (60% in
2010 and 45% in 2011) as customers felt the need to upgrade old
fleets and replace old equipment and also due to the recovery of
the global economy. However, due to the nature of cyclical
industry, the sales in this segment started to decrease in 2013. To
be more specific, the sales in this segment down by 17% versus the
first quarter of 2012 and keep decrease in the following quarters,
9% in second quarter and 7% in the third quarter compared with
the same period in 2012. Geographically, North America, Latin
America, EAME and Asia Pacific’s sales were all decline 7.7%, 8%,
20% and 12%, respectively during the 3 quarters in 2013. The
decline in EAME was primarily due to changes in dealer inventory
and construction activity in Europe remains low. In Asia/Pacific,
sales increases in China were more than offset by sales declines in
other countries due to slower economic growth.
UOIG 2
University of Oregon Investment Group
11/25/2013
Resource Industry: 32%
Sales Comparison Construction Industries
$6,000.00
$4,000.00
$2,000.00
$1Q
2Q
2012
3Q
4Q
2013
The Resource Industries segment is primarily responsible for
supporting customers using machinery in mine and quarry
applications. It also serves forestry, paving, tunneling, industrial and
waste customers. In July 2011, Caterpillar Inc. acquired Bucyrus
International Inc. and now offers mining customers the broadest
product range in the industry. Over the past two years, Caterpillar
Inc. has added capacity for mining products to better align
production with expected demand. As a result, sales in 2012 are
higher than 2011. In addition, during the second quarter of 2012,
the acquisition of Siwei was completed. Siwei is a Chinese
company that primarily designs, manufactures, sells and supports
underground coal mining equipment and is known for its expertise
in manufacturing mining support equipment. However, the
revenue generated from this segment in the first, second and third
quarter of 2013 were down by 23%, 16% and 42%, respectively
compared with the first quarter in 2012. Geographically, sales were
lower in every region of the world, with the most significant decline
in Asia/Pacific region, where is on average 50% lower than the first
3 quarters in 2012. Sales in North America, Latin America and EAME
regions are all lower 29%, 20% and 19% than the same period in
2012. According to the management analysis, this big decline in
sales is because after several years of increasing capital
expenditures, mining customers in all geographic regions have
reduced spending across the mining industry and they do not
expect the sales in mining increase in the following year.
Power Systems: 34%
Sales Comparison - Power
Industries
$6,000
$4,000
$2,000
$1Q
2Q
2012
3Q
2013
4Q
Power Systems segment is primarily responsible for supporting
customers using reciprocating engines, turbines and related parts
across industries serving electric power, industrial, petroleum and
marine applications as well as rail-related businesses. The demand
for Power Systems products and services increased significantly in
the developing world and Caterpillar Inc. have made investments
to increase their production in line with regional demand. During
the 2011 and 2012, Caterpillar opened a new Electro-Motive Diesel
Inc. manufacturing facility in Brazil and also acquired MWM, a
leading supplier of nature gas and alternative-fuel engines, in
response to increasing customer demand for sustainable power
alternatives. In addition, U.S. Environmental Protection Agency
(EPA) required Caterpillar Inc. make significant investments in
research and development that will continue as new products are
phased in over the next several years. In this segment, Caterpillar
Inc.’s main competitors include Cummins Inc., Tognum AG etc.
Sales made in this segment decreased a little bit compared with
2012, but the change is flat.
UOIG 3
University of Oregon Investment Group
11/25/2013
Financial Products: 5%
Sales Comparison Financial Products
$850
$800
$750
$700
1Q
2Q
2012
3Q
2013
4Q
Financial Products segment provides financing to customers and
dealers for the purchase and lease of Caterpillar and other
equipment, as well as some financing for Caterpillar sales to
dealers. This segment also provides various forms of insurance to
customers and dealers to help support the purchase and lease of
our equipment. In 2012, the revenue was up 4% compared with
2011. The increase was primarily due to the favorable impact from
average earning assets and an increase in Cat Insurance. Cat
Financial operates in a highly competitive environment, with
financing for users of Caterpillar equipment available through a
variety of sources, principally commercial banks and finance and
leasing companies. Main competitors include Wells Fargo
Equipment Finance Inc. General Electric Capital Corporation and
various other banks and finance companies.
Strategic Positioning
Vision 2020 Strategy
Caterpillar Inc. has established the new business strategy called
Vision 2020. The strategy sets the stage for next phase of the
company’s leadership and growth in the global industries it servers.
The 3 strategic goal set by company are “Superior result”, “Global
Leader” and “Best Team”. Based on this strategy, Caterpillar Inc.
develops “Big 8” imperatives for its business. During the following
years, Caterpillars Inc.’s first goal is to win the competitions in
Chinese mining and construction market, and to become more
competitive in India and ASEAN (Association of South East Asian
Nation). In order to winning in China, Caterpillar Inc. acquired
Zhengzhou Siwei and Shandong Engineering Machinery Co. (SEM)
recently. Both Siwei and SEM are leading providers in the industries
they operates. Second, Caterpillar Inc. aims to expending
leadership in Mining and Quarry industry. In July of 2011, Caterpillar
Inc. acquired Bucyrus International Inc. The acquisition was the
largest in the company’s history. By acquiring the Bucyrus,
Caterpillar Inc. established the leadership in mining industry across
the world. According the Bloomberg business Week, Bucyrus gives
Caterpillar an opportunity to gain from growth in emerging
markets since the increasing rate of globalization and urbanization
in the emerging countries.
UOIG 4
University of Oregon Investment Group
11/25/2013
Business Growth Strategies
Winning in China
Caterpillar Inc.’s management made it clear that in the next five
years, their main goal in terms of growth is to capture more market
shares in emerging markets, especially in China. Currently, Sales
and revenues generated from China is only a small portion of total
revenue. However, along with the increasing demand of
globalization and urbanization, China becomes the most
profitable market in the world for companies like Caterpillar Inc.
Over the past years, the increasing investments made in China
indicates that Caterpillar Inc. hold a long-term view in China. Last
year, Caterpillar Inc. acquired ERA mining, which provided it with
crucial share in the underground rood support segment of China’s
mining equipment market. Besides, Caterpillar Inc. opened a large
wheel loader manufacturing facility and proving ground in
Tongzhou, Jiangsu Province. In total, Caterpillar Inc. now has 24
existing manufacturing facilities, four R&D centers, three logistics
and parts centers and a few other facilities under construction.
According to the statistics data from Morningstar, currently, 50% of
China’s population lives in cities, compared to an urban
population of 80% in the UK and 82% in the U.S. The increasingly
demand for urbanization demands more construction projects on
residential housing and infrastructures. In addition, demand for
power and energy will increase in the next few years as well.
Currently, the level of energy consumption per person in China is
well below that of in the developed country. For example, China
consumes around 3.5 MWh of electricity per person per year,
compared to 12.5 MWh of electricity consumed per person per
year in the U.S. That been said, Caterpillar Inc.’s new strategy that
focus on China’s market will reward them with a great profit in a
long run.
This strategy has been success so far as the company published
their third quarterly report. Based on the operating results, while
sales in Asia/Pacific declined overall, sales in China increased as
they focus on increasing field population, improving customer
loyalty and providing superior customer support in conjunction
with their independent dealers. The total sales and revenues made
in China were about 800 million in the third quarter 2013 as
compared with about 600 million in the same period 2012. Sales
and revenues in China represented about 6 percent of total
company sales and revenues in the third quarter of 2013.
UOIG 5
University of Oregon Investment Group
11/25/2013
Industry
Overview
This industry mines various types of coal. According to the IBIS
World, in the next five years, mining industry is anticipated to grow
moderately due to the projected slowdowns in Brazil, Russia, India
and China, whose economics serves as important indicators of
global trends. However, the challenge that mining industry face is
the increasing use of nature gas is expected to continue to eat
into coal demand over next five years. Consequently, the US Coal
mining industry’s revenue is projected to rise at a slower average
annual rate of 1.5% to 46.8 billion in the five years to 2018. The
whole industry is highly sensitive to global economic conditions
and the demand in this industry is very cyclical. This industry, which
had been in the midst of a recovery, is once again facing a
number of challenges. According to a new report, construction
output is expected to increase by more than 70 percent – to $15
trillion worldwide, by 2025. China, India, and the United States are
expected to account for nearly 60 percent of that growth,
whereas growth in Japan will be considerably less robust during
that time. The report indicates that at present 52 percent of all
construction activity is taking place in such emerging markets as
China and India and predicts that by 2025 those markets will
account for 63 percent of all activity.
United States GDP
Growth Outlook
4.000%
3.000%
2.000%
1.000%
0.000%
China GDP Growth
Outlook
10.000%
8.000%
6.000%
4.000%
2.000%
0.000%
Macro Factors – United States
The Gross Domestic Product (GDP) in the United States expended
at an annual rate of 2.8 percent in the third quarter of 2013 over
the previous quarter. Economic activity in the manufacturing
sector expended in October for the fifth consecutive month, and
the overall economy grew for the 3rd consecutive month. The PMI
(Purchasing Managers Index) rose to 56.4 percent in October from
September’s reading of 56.2 percent. PMI is an indicator of the
economic health of the management sector. It is based on five
major indicators: new orders, inventory levels, production, supplier
deliveries and the employment environment. US industrial
production fell 0.1% in October according to official data from the
Federal Reserve, dashing expectations of a 0.2% rise among
economists polled by Reuters. However, the fall was largely
blamed by the Fed on oil and gas rig shutdowns in the Gulf of
Mexico. Forwarding looking, both business surveys and official
payrolls data indicate that companies continues to hire extra
people in October, which suggests that firms have confidence
that business levels will continue to rise.
Macro Factors – Emerging Markets
China: Since 2010, China become the world’s largest construction
market, and although construction is expected to slow in China
because of slower production growth. China’s global share is
forecast to rise from 18 percent today to 26 percent in 2025 as a
result of increased urbanization and a growing middle class.
UOIG 6
University of Oregon Investment Group
Inida GDP Growth Outlook
8.000%
7.000%
6.000%
5.000%
4.000%
3.000%
2.000%
1.000%
0.000%
11/25/2013
India: India’s share of the global construction market is expected
to increase from 4% to 7% by 2025, and will overtake Japan as the
world’s third-largest market.
Competition
2011 2012 2013 2014 2015 2016 2017 2018
Latin America GDP Growth
Outlook
5.000%
4.000%
3.000%
2.000%
1.000%
0.000%
2011 2012 2013 2014 2015 2016 2017 2018
As the world biggest manufacturer in the construction and mining
equipment industry, Caterpillar Inc. faces the competition both
domestically and internationally. According to the IBIS World, the
Construction Machinery Manufacturing industry displays a medium
level of market share concentration. The four largest players in the
industry account for an estimated 39.2% of industry revenue.
Domestically, Caterpillar Inc. and Deere & Company are the
largest players in the industry, accounting for 29.9% and 7.8% of
industry revenue respectively. The industry also has a number of
smaller players, the most notable being Komatsu Ltd, CNH Global
NV and Terex Corporation, each controlling less than 5.0% market
share.
Internationally, Caterpillar Inc.’s major competitor is Komatsu,
which is the Japan-based company that operates in construction
& mining industry in Asia/Pacific regions.
Over the past 5 year, Caterpillar Inc.’s market shares have been
increased due to the merging &acquisition activities. However, its
biggest competitor Deere & Company is expected to lose some
market shares due to the rising companies such as CHN Global
NV.
Management and Employee Relations
Douglas R. Oberhelman - CEO
Oberhelman joined Caterpillar in 1975 and has held a variety of
positions including senior finance representative, region finance
manager and district manager for the company’s North American
Commercial Division. Oberhelman was elect a vice president in
1995, serving as Caterpillar’s chief financial officer with
administrative responsibility for the corporation’s accounting,
information service, tax, treasury, investor relations and marketing
support services areas from1995 to November 1998. He was
elected a group president and member of Caterpillar’s executive
office in 2002. In October 2009, the caterpillar Board of Directors
named Oberhelman vice chairman and CEO-Elect. During this
time, he led a team that developed the future strategic plan for
the company. Oberhelman was elected chief executive officer
and a member of Board of Directors effective July 1, 2010, and
become chairman effective November 1, 2010.
UOIG 7
University of Oregon Investment Group
11/25/2013
Bradley M. Halverson - CFO
Brad Halverson is a group president and CFO of Caterpillar Inc. He
has responsibility for Finance Service Division, Human Service
Division, Global information Service Division and Financial Products
Division, as well as Strategy & Business Development, Corporate
Auditing and Investor Relations. Halverson joined Caterpillar in 1988
as an accountant after your years of public accounting
experience. In 1993, he moved to Switzerland to become a
strategy and planning consultant with Caterpillar Overseas. From
1998 until 2002, Halverson managed a variety of business resource
departments in Caterpillar’s Engine Division and was the director
of Corporate Business Development.
Management Guidance
Revenue Forecast:
The year 2013 has been a challenging year to Caterpillar Inc.
During this year, management overestimated their revenue 3 times
in a row. At the April 22nd, they revised their forecast on revenue
down from $60B – 68B to 57B – 61B due to the decline in mining
industry. Besides, they lowered the forecast for capital
expenditures and expected to be less than $3 billion for the year of
2013. In the second quarter, they lowered their forecast on
revenue again to 56B – 58B, with the decrease in profit of about $7
per shares to $6.5 per share. Once again, at the end of the third
quarter, they lowered the outlook for 2013 revenues to about 55
billion dollars and now expecting profit in 2013 to be about $5.5
per share, and that is down from $6.5 at the middle of the previous
sales outlook range.
Outlook for 2014:
In general, when the economic indicators began to look more
positive, they will forecast better growth on revenue since the
macroeconomic plays a key role in forficate revenue. Due to the
uncertain of U.S. fiscal and monetary policy, unhealthy of Eurozone
economy and the continued transition to a more consumerdemand led economy in China, management expect 2014 sales
and revenues to be flat, with +/- 5% range. Management believe
that it is really hard to predict the growth for the mining industry,
which is the most important and profitable business segment to
Caterpillar Inc. they would not be increasing their expectations for
resource industries until mining orders improve despite of the
expected economic growth in 2014 and a continuation od strong
mine production around the world.
UOIG 8
University of Oregon Investment Group
11/25/2013
Portfolio Strategy
Currently, Caterpillar Inc. (CAT) has been hold 300 shares in Tall Firs
portfolio with the portfolio weight about 2.69% at cost of $26,989
and as the 11/20/2013, the market value is $24,804, which
indicates an unrealized loss of $2,185.
At 10/16/2012, UOIG purchased 150 shares at $84.77
At 1/25/2013, UOIG purchased another 150 shares at $95.16
Recent News

Caterpillar to close another mining equipment
plant – Reuters 11/15/2013
“Caterpillar Inc. said on Friday that it will close another
plant and lay off 240additional workers as it continues to
respond to a sharp drop in demand for its earth-moving
products from customers in the mining industry.”

Caterpillar Inc. Stock Buy Recommendation
Reiterated (CAT) – TheStreet.com 11/14/2013
“NEW YORK (TheStreet) -- Caterpillar (NYSE:CAT) has been
reiterated by TheStreet Ratings as a buy with a ratings
score of B. The company's strengths can be seen in multiple
areas, such as its reasonable valuation levels, good cash
flow from operations and notable return on equity. We feel
these strengths outweigh the fact that the company has
had sub par growth in net income.”

China growth picture may dim but for Caterpillar
it's a bright spot – Reuters 07/24/2013
“Alex Blanton, a senior analyst at Clear Harbor Asset
Management in New York, says China's stated policy of
accelerated urbanization - the government plans to move
more than 20 million people a year from the farm to the
cities in the coming decade - will drive growth. China will
continue to require massive investments in infrastructure
and other kinds of construction that will drive demand for
the heavy machinery and other goods made by U.S.
industrial companies like Caterpillar, he said.”
Catalysts
Upside

Mining industry revenue is forecast to increases at the rate
of 8.5% per year to reach $667.5 billion in 2018 and the
UOIG 9
University of Oregon Investment Group
11/25/2013
global mining equipment market is expected to reach $117
billion by 2018 at a CAGR of 8.5%.

The US Coal mining industry’s revenue is projected to rise at
a slower average annual rate of 1.5% to 46.8 billion in the
five years to 2018.

The growth outlook for the Latin America region remains
strong as demand for construction and infrastructure
projects has spurred equipment demand in Brazil as the
nation prepares for the 2014 World Cup and 2016 Olympic
Games.
Downside

Slow economic recovery and continued low demand for
mining equipment, which is the most profitable product to
Caterpillar Inc. will prevent the company from reporting
decent margins in the near future.

From economic standpoint, the uncertain of U.S. fiscal and
monetary policy, unhealthy of Eurozone economy and the
continued transition to a more consumer-demand led
economy in China cloud the company’s future

Based on the mining industry survey, the total mining CapEx
in 2013 is likely to be down 5% to 10% from 2012 and survey
also indicates that further CapEx decline near 20% for 2014.
Comparable Analysis
Deere & Company (50%)
“Deere and Company, incorporated in 1958, along with its
subsidiaries, operates in three segments: agriculture and turf
segment, construction and forestry segment and financial services
segment. The agriculture and turf segment primarily manufactures
and distributes a range of farm and turf equipment and related
service parts. The construction and forestry segment primarily
manufactures a range of machines and service parts used in
construction, earth moving, material handling, crawler dozers,
excavators and motor graders. The Financial Services segment
provides wholesale financing to dealers of the foregoing
equipment and provides operating loans.” – Reuters
I chose Deere & Company as the most important comparable
company and gave it a weight of 50% is because Deere shared
same characteristics as Caterpillar Inc. in many ways. First, they are
the two main players in the same industry (Farm & Construction).
That is to say, risks that affect Caterpillar Inc. performance may
also affect Deere vice versa. Besides, in terms of market
UOIG 10
University of Oregon Investment Group
11/25/2013
capitalization, Deere is the closest company compared with
Caterpillar Inc. (31.47B vs. 53.75B). Besides, Deere’s five years
growth rate (CAGR) in Sales (8.5% vs. 7.9%), EBITDA (7.6% vs. 9.7%)
and EPS (13.8% vs. 9.6%) are very similar to Caterpillar Inc. as well.
Cummins Inc. (20%)
Cummins Inc. manufactures diesel and nature gas engines,
electric
power
generation
system,
and
engine-related
components. Slightly more than half of Cummins revenues are
from its markets outside the US, including India, China, Europe,
Middle East and Australia. Cummins Inc. has four business
segments: engine segment, power generation segment,
components segment and distribution segment.
I chose Cummins Inc. and gave it a weight of 20% is not only
because they have similar beta as Caterpillar Inc. but also
because Cummins’s power generation segment contributed 20%
of Cummins’ sales. Caterpillar Inc.’s power system segment is also
an important channel to generate revenue, their power system
segment contributes 34% of Caterpillar Inc.’s revenue.
Komatsu (15%)
“Komatsu, together with its subsidiaries, engages in the
development, manufacture, marketing and sale of various
industrial-use products and services. Its construction, mining and
utility equipment segment offers excavating equipment, such as
hydraulic excavators, mini excavators and backhoe loaders. The
company’s industrial machinery and others segment offers metal
forging and stamping presses; sheet-metal machines, plasma
cutting machines and press breakers.” –Yahoo! Finance
Besides having similar beta and profit margin, Komatsu is a good
comparable company to Caterpillar Inc. because Komatsu is the
biggest player in the machinery and construction industry in
Asia/Pacific region. Since one of Caterpillar Inc.’s strategic goal in
the next five year is winning in Asia/Pacific region, use Komatsu as
a compare company to see how Caterpillar Inc. performance in
Asia/Pacific region is fair.
ABB U.S. (10%)
“ABB Ltd, incur incorporated on March 5, 1999, is engaged in
power and automation technologies committed to improving
performance and lowering the environmental impact for utility
and industry customers. The Company provides a broad range of
products, systems, solutions and services that are designed to
power grid reliability boost industrial productivity and enhance
energy efficiency.” -- Reuters
ABB U.S has the similar market cap and beta as Caterpillar Inc. In
addition, ABB has closely worked with key customer Caterpillar for
about 30 years on sustainable, energy efficient turbocharger
UOIG 11
University of Oregon Investment Group
11/25/2013
solutions for a variety of Caterpillar industrial engines. Like ABB U.S,
Caterpillar Inc. acquired MWM in October 2011. MWM is a leading
supplier of natural gas and alternative-fuel engine, in response to
increasing customer demand for sustainable power alternatives.
Moreover, both ABB U.S and Caterpillar Inc. have similar sales
growth rate during the past 5 years.
PACCAR Inc. (5%)
“Founded in 1905 in Bellevue, Washington, Paccar Inc. becomes a
Fortune 500 company and was ranked the third-largest
manufacturer of medium- and heavy-duty trucks in the world in
2011-12. The company offers its trucks for use in the over-the-road
and off-highway hauling of freight, petroleum, wood products and
construction. It also provides finance and leasing products and
services, such as inventory financing for independent dealers.” –
Yahoo Finance
PACCAR Inc. is a reasonable comparable company to Caterpillar
Inc. because they have similar beta and profit margin. Besides,
PACCAR Inc. mainly focuses on manufacturing on heavy-duty
truck that used in construction industry. In addition, both
companies are utilizing Six Sigma to help suppliers manage their
business by focusing on reducing cost by shortening cycle times
and simplifying logistic flow.
Discounted Cash Flow Analysis
Revenue Model
 Aggregated Revenue Model: This one is on the top of the
Reveue Outlook
80000
60000
40000
20000
0

five models I built for Caterpillar Inc. Since Caterpillar Inc.
operates in 4 regions, I built revenue for each of the region
and then aggregated them together as the revenue
model for Caterpillar Inc. As a result, I projected the
revenue for 2013 to be about $55 billion, which mainly
contributed by construction industrial ($18 billion, down by
5%), resource industries (13 billion, down by 38%), power
system industries (19.7 billion, down by 7%) and Financial
industries (3.2 billion, up by 4.8%)
North America: In 2013, the housing industry has improved
and many state and local government budgets are
showing signs of improvement. However, the changes in
dealer inventory negatively impact the business and offset
the increasing demand in North America. Based on the
guidance, I projected the sales and revenues from
construction segment, power system segment and
financial segment to be flat and the resource segment
down by 5%. From the 2014 through 2018, I projected the
sales and revenues on all the business segment would
increasing at the rate of 3%.
UOIG 12
University of Oregon Investment Group
11/25/2013



Latin America: The increasing in my projection in 2013 on
construction segment was mainly due to the continuing
sales from a large government order in Brazil. In 2014, I
projected that the sales on all of business segment will
increase 7%. From the 2014 through 2018, I projected the
increase rate would be 5% on the Caterpillar Inc.’s main
business segment.
EAME: In 2013, the demand declined as a result of
continuing economic weakness in Europe, dealer inventory
changes were negatively affect the sales. In 2014, I
projected the sales and revenues to be flat mainly
because the slow economic growth rate in Eurozone. From
the 2014 to 2018, I expected the sales and revenues
increasing at the rate of 3%.
Asia/Pacific: My projection of revenue on Asia/Pacific in
2013 indicates the similar results as company’s 10-Q.
According to 10-Q, the most significant reduction was in
Asia/Pacific. It was primarily related to lower sales in
Australia where the most significant decrease was in mining
sales, due to continued low demand. In 2014, I projected
the sales and revenues up by 5% and from the 2014 to
2018, the sales and revenues on all business segment would
be grow at the rate of 5%.
Beta
To calculate the beta for my valuation, I ran beta for 1 year daily,
3 year daily, 3 year weekly, 5 year weekly, 1 year daily vasicek, 3
year weekly vasicek, 1 year daily Hamada and 3 year weekly
Hamada. Among these 8 betas, I chose to weight equally on 1
year daily, 3 year daily, 5 year weekly, 1 year daily Hamada and 3
year weekly Hamada.
Cost of Goods Sold
This year has been tough for Caterpillar Inc. Due to the significant
drop in sales, the management have been aggressively reducing
cost to offset the impact of lower sales. Over the year, they have
cut more than 13,000 jobs and temporarily shut down many mining
plants across the world. In my DCF valuation, I reduced COGS for
the 4th quarter. Overall, the annual COGS is about 67% of revenue,
down 18% compared with 2012.
Research and Development
Management did not give a clear guidance on the R&D this year,
but in order to comply with EPA’s emission standards for their
products, they will continuously invest in R&D. I projected the R&D
based on the percentage of Revenue with the increasing trend.
Depreciation and Amortization
Caterpillar Inc. calculates D&A using both straight-line and
accelerating method. Since there is no guidance on this item, I
calculate it based on the percentage of revenue.
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Capital Expenditures
According to the management, they believe total mining CapEx
in 2013 is likely to be down 5% to 10% from 2012 and it will decline
near 20% for 2014. I projected CapEx based on this guidance.
CapEx in 2013 is estimated at about $3023 million dollars, or 10%
decrease compared with 2012. In 2014, I projected CapEx down
by 14% compared with 2013.
Acquisition
Even though management did not provide any guidance on
acquisition, I believe that they would not spend much more on
acquisition since they acquired Bucyrus International and MWM
Holding on 2011. And the acquisition of Bucyrus International was
the largest acquisition over the past 50 years. For this reason, I
projected acquisition based on the percentage of revenue.
Tax
Based on the company’s third quarter 10-Q, the provision for
income taxes for the first nine months of 2013 reflects an estimated
annual effective tax rate of 29 percent compared with 30.5
percent for 2012. The decrease is primarily due to the U.S. research
and development tax credit that was expired in 2012, along with
expected changes in company’s geographic mix of profits from a
tax perspective.
Recommendation
I recommend a hold to Tall Firs portfolio. Even though the sales
drop dramatically this year and would be drop again in next year,
Caterpillar’s huge size, presence in China, brand equity, and
diversification across the globe are advantages in the long term.
Besides, the discounted cash flow valuation along with the
comparable analysis indicates that Caterpillar Inc. currently is
undervalue by 8.85%. The slowdown of mining industry activities
negatively affect Caterpillar Inc. in 2013, but even during the
downturn, Caterpillar Inc. demonstrates its ability to generate
positive cash flow. Forward looking, the global economics would
get better, especially in the emerging market. By implementing its
new strategy “Winning in China”, Caterpillar Inc. will show a
decent performance in the following year.
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Appendix 1 – Relative Valuation
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Appendix 2 – Discounted Cash Flows Valuation
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Appendix 3 – Revenue Model
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Appendix 4 – Working Capital Model
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Appendix 5 – Discounted Cash Flows Valuation Assumptions
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Appendix 6 –Sensitivity Analysis
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Appendix 8 – Sources
SEC Filings
Company Investor Relations page
Company presentations
Prospectuses
Press releases
Earnings call transcripts
Inside ownership
Databases available through UO Libraries
IBIS World
S&P Net Advantage
ONEsearch
Mergent Online
Factset
Seeking Alpha
Bloomberg Business Week
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