CAT Market Research & Analysis Report
Updated Sep 11, 2015

Growth and Balance Sheet

The company reported net income of $710 million, or $1.16 diluted earnings per share for the second quarter of 2015 ending June 30. That's down from net income of $999 million, or $1.57 diluted earnings per share for the same quarter last year. Revenue for the second quarter was $12,317 million, down from $14,150 million for the same quarter last year. Company’s segments showed mixed growths in revenue in comparison to the same quarter last year. Constructions industries segment revenue was down 17.9% to $4,441 million, primarily due to lower end-user demand and an unfavorable currency impact. Resource industries segment revenue was down 11.2% to $1,991 million, primarily due to lower sales volume and negative exchange rate impact. Energy & Transport segment revenue was down 12.2% to $4,544 million, primarily due to lower sales volume and unfavorable exchange rate movements, primarily from the euro. All other segment revenue was up 9.3% to $637 million. Company’s gross margin was up over 90 basis points to 28.86% for this quarter, from 27.94% for the same quarter last year. The operating margin deteriorated from 10.42% for last year’s second quarter to 9.17% for the current quarter. Cash flows provided by operating activities for the six months ending June 30, 2015 was $3,358 million, down from $4,134 million for the same period last year. Cash and cash equivalents as of June 30, 2015 were $7,821 million, in comparison to $7,341 million as of December 31, 2014. CAT forecasted EPS for the third quarter of 2015 are expected to be from 73 cents to $1.03, compared to actual EPS of $1.64 for the third quarter of last year. The financial strength indicators of the company are at satisfactory levels. Company’s current ratio is 1.49 and the industry average ratio is 1.73. The quick ratio of 1.04 is also below the industry average of 1.17. The interest coverage ratio of 13.40 is at worse levels than the industry average of 17.83, but it is still at very healthy levels. In terms of efficiency and effectiveness, the asset turnover ratio of 0.62 is trailing the industry average of 0.69; the inventory turnover ratio of 3.10 is better than the industry average ratio of 2.94; and the ROE of 18.95% is better than the industry average of 16.7%.

Valuation

CAT PE stands at 12.36 below the industry average of 21.43, and below the stock market average represented by the S&P 500 P/E of 20.35. The company is currently trading below the maximum P/E ratio of 15x, and over the last five years, the company’s shares have traded in the range of 10.56x to 22.56x trailing 12-month earnings. CAT's current Price/Sales of 0.83 is in line with the average of its industry of 0.86. CAT’s head to head comparison to its main competitors shows that the company has comparable gross margin with the main competitors, and one that is also in line with the industry average. The achieved operating margin by the company is also in line with the achieved margins by the competition, and it is above the industry average. The company quarterly revenue growth rate is negative and it is the worst result in comparison to what competitors have achieved for the quarter, and below the industry average. The company trades at comparable P/E ratio with both of the selected peers. The P/S ratio is almost identical to DE’s ratio and it is below the P/S ratio of CMI. CAT’s twelve trailing months EBITDA is $8.53 billion highest result from the selected competitors, and above the industry average EBITDA of $53.35 million. The stock is currently trading below its intrinsic value of $79.91, this suggests that the stock is currently undervalued at these levels. The beta of 0.82 implies lower volatility of the stock with respect to the S&P 500. CAT has shown favorable earnings consistency over the last five years. Moreover, company’s earnings have increased by 32.67% over the same period. The current quarter earnings in comparison to the same quarter last year have decreased by 26.1%. CAT’s Total Debt/Equity of 223.33 is above the required maximum, but it is in line with the industry average of 220.7. CAT’s current price levels are above the maximum level, 32.4% below the 52 week high of $107.12, and the technical analysis give negative view of the stock. The majority of analyst ratings are hold. CAT has a twelve trailing month dividend payout ratio of 48% and trailing annual dividend yield of 3.90%.

About CAT

Caterpillar Inc. is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The Company principally operates through its three product segments: Resource Industries, Construction Industries, and Energy & Transportation. The Company also provides financing and related services through its Financial Products segment. It offers its products under the brand names Caterpillar, CAT, design versions of CAT and Caterpillar, Electro-Motive, FG Wilson, MaK, MWM, Perkins, Progress Rail, SEM and Solar Turbines. It operates parts distribution centers at various locations, including Morton, Illinois; Arvin, California; Denver, Colorado; Miami, Florida; Atlanta, Georgia; St. Paul, Minnesota, and Dubai, United Arab Emirates, among others. Its subsidiaries include Caterpillar Life Insurance Company, Cat Financial and Caterpillar Product Services Corporation (CPSC), among others.

Competitor Comparison

Caterpillar Inc. N.V.

Highlights

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. The stock closed yesterday’s trading session at $72.42. In the past year, the stock has hit a 52-week low of $70.23 and 52-week high of $107.12. The intrinsic value of the stock is above the current price. CAT has a market cap of $43.64 billion and is part of the Industrial Goods sector.

• Strong brand portfolio and diversified geographic presence   
• Expansive dealer and distributor network helps increasing market share
• Customer driven product innovation capabilities

• Legal proceedings could have material adverse effects    

CAT Intrinsic Value

Stock Valuation Model & Intrinsic Value Definitions

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. CAT's 52 week high is $107.12, current price is $72.42, is 32.4% below the 52 week high.

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. The company has a P/E ratio of 12.36, the average industry P/E ratio is 21.43, and is below the S&P 500 P/E ratio of 20.35.

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.  Insiders own 0.25% of CAT stock. Management's representation is not large enough. This does not satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

CAT is trading in the range of $71.00 - $79.12 in the past 30 days. The stock has been showing support around the level of $72 and resistance in the $88 range. The stock is trading below the 50-Day Moving Average and below the 200-Day Moving Average. The RSI(14) is 37.91. From the highs reached in October 2014 the stock experience a sharp decline and fell to around $78 by April 2015. In the next 3 months the stock recovered some of the value, but found resistance around the level of $90. This was followed by another decline, and the stock went below the support that held in April. Our indicators give negative view of CAT.

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Investor’s sentiment for the stock.

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com are 3 Buy, 2 Outperform, 17 Hold, 2 Underperform, and 1 Sell.

We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. CAT’s annual EPS for the last 5 years were 4.15, 7.40, 8.48, 5.75 and 5.88 this type of earnings action is favorable.

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry. CAT’s Total Debt/Equity of 223.33 is above the required maximum, but it is in line with the industry average of 220.7.

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. CAT’s EPS growth for this quarter relative to the same quarter a year earlier is -26.1%, below our target.

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. CAT’s annual earnings growth rate over the past five years is 32.67%, above our target.

¹Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.