I have analyzed Caterpillar's financial statements to determine whether the reported figures suggest that the company's shares are a good value and reasonable risk for prudent investors. The way I performed this analysis was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.
The analysis evaluates investment suitability by gauging how well the company satisfies seven criteria. GREEN, YELLOW, and RED grades indicate whether each gauge is fully satisfied, partially satisfied, or not satisfied at all. An Overall Score between zero and 100, which takes the details of all gauges into account, is also computed. While the analysis includes both growth and value criteria, the calculation is weighted to favor companies that exhibit good value characteristics over firms that are fast growers but expensive.
An Overall Score of 60 or higher is a good result, and it signifies that the company has enough value-investment appeal to be worth examining in more detail.
First, a quick review of the company itself.
Caterpillar is a leading manufacturer and servicer of machinery for construction, mining, energy production, and transportation. The company also has finance subsidiaries that help customers and dealers purchase and lease Caterpillar and certain other products. Demand for Caterpillar's products tends to vary as economic conditions strengthen and weaken and commodity prices rise and fall.
Caterpillar recorded profits of $3 billion on revenue of $44 billion during the last year. In the quarter that ended on 30 September 2020, Caterpillar earned $1.34 per share (excluding certain items), which significantly beat the $1.17 Wall Street consensus forecast. See https://tinyurl.com/y383pnzo for Caterpillar's most recent quarterly report.
Shares of Caterpillar now trade for about $157 each. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, Standard and Poors Dividend Aristocrats, New York Stock Exchange Composite, and Russell 1000 stock indices.
Analysis Results:
Caterpillar's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments
1. The Company's Size is Substantial: GREEN
Market Value: $85.6 billion (large cap)
2. The Company is Conservatively Financed: RED
Current ratio = 1.5 (>2.0 is conservative)
Long-term debt/Working Capital = 193% (<150% is conservative)
3. The Company Generates Stable Earnings: RED
Seventeen positive quarterly earnings reports in last 5 years (worrisome)
Earnings variability = 23% (moderate)
4. The Company Exhibits Earnings Growth: GREEN
Owner Earnings growth rate (trailing year) = -37% (poor)
Owner Earnings growth rate (five-year average) = 39% (very good)
Free Cash Flow growth rate (trailing year) = 12% (good)
Free Cash Flow growth rate (five-year average) = 10% (good)
5. The Company is Efficiently Profitable: YELLOW
Cash Flow Return On Invested Capital = 13% (decent)
Operating Profit/Sales = 16.3% (very good)
6. The Company Pays a Healthy Dividend: GREEN
Dividends paid for the last 7 years or longer
Dividend 5-year average growth rate = 8% (fair)
Dividend = 52% of last year's FCF (sustainable)
7. The Company's Shares are Fairly Valued: RED
Price/Owner Earnings (last year) = 17.6 (moderate to pricey)
Price/GAAP Earnings (five-year average) = 30.2 (expensive)
Free Cash Flow/Market Value = 5.1% (modest, about the same as the five-year average of 5.3%)
Acquirer's Multiple = 16.1 (expensive)
Price/Book Value = 5.7 (more expensive than the five-year average of 4.7)
Price/Sales = 2.0 (more expensive than the five-year average of 1.5)
In summary, the analysis assigned Caterpillar three GREEN, one YELLOW, and three RED grades. The resulting Overall Score is 38 of the 100 possible points, which is unappealing. The score is below the 60-point threshold, and, therefore, Caterpillar does not qualify at this time for consideration by value investors.
Check back here occasionally for updates to the Overall Score, which can change when the company releases new financial results and when there's a significant change in the company's share price.
This analysis reported here is not, by any means, a complete evaluation of the subject company, and it does not consider all material facts about the company's operations, finances, or future prospects. The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate. Readers are encouraged to independently verify all data. Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk. The analysis is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The methodology and results are subject to change without notification.
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