CAT: Gauge Analysis (updated February 17, 2021)

I have analyzed Caterpillar's financial statements to determine whether the company's shares can be considered a good value and reasonable risk for prudent investors. My analytical approach 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 uses gauges to assess how well the company satisfies seven specific investment criteria.  GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied.  An Overall Score between zero and 100, which takes all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the Overall Score calculation by design favors companies with good value characteristics over fast-growing, but expensive firms.  An Overall Score above 60 signifies the company is worth examining in more detail; a score over 80 is a rare accomplishment.

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 $42 billion during the last year. In the quarter that ended on December 31, 2020, Caterpillar earned $2.12 per share (excluding certain items), which significantly beat the $1.49 Wall Street consensus forecast. See Caterpillar's most recent quarterly report.

Shares of Caterpillar now trade for about $202 each, giving the company a market value of $111 billion. 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: $111.2 billion (mega-cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.5 (>2.0 is conservative)

    Long-term debt/Working Capital = 189% (<150% is conservative)

3. The Company Generates Stable Earnings: RED

    Eighteen positive quarterly earnings reports in last 5 years (not too bad)

    Earnings variability = 72% (very high)

4. The Company Exhibits Earnings Growth: YELLOW

    Owner Earnings growth rate (trailing year) = -36% (poor)

    Owner Earnings growth rate (five-year average) = 26% (very good)

    Free Cash Flow growth rate (trailing year) = -1% (poor)

    Free Cash Flow growth rate (five-year average) = 12% (good)

5. The Company is Efficiently Profitable: YELLOW

    Cash Flow Return On Invested Capital = 12% (decent)

    Operating Profit/Sales = 15.8% (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 = 54% of last year's FCF (sustainable)

7. The Company's Shares are Fairly Valued: RED

    Price/Owner Earnings (last year) = 24.1 (high)

    Price/GAAP Earnings (five-year average) = 36.7 (expensive)

    Free Cash Flow/Market Value = 3.8% (low, less than the five-year average of 5.0%)

    Acquirer's Multiple = 21.0 (expensive)

    Price/Book Value = 7.2 (more expensive than the five-year average of 4.9)

    Price/Sales = 2.7 (more expensive than the five-year average of 1.6)

In summary, the analysis assigned Caterpillar two GREEN, two YELLOW, and three RED grades.  The resulting Overall Score is 32 of the 100 possible points, which is low.  The score is below the 60-point GCFR threshold, and, therefore, Caterpillar does not satisfy the GCFR criteria for investment consideration at this time.

The Overall Score would only increase to 55 points if the share price were to fall by 50%, from $202.38 to $100.83, all else being equal. It is also possible that Caterpillar's future results will push the score up (or pull it down).  Revisit GCFR2 occasionally for updates on Caterpillar's performance and the latest GCFR gauges and scores.

This analysis reported here is a limited evaluation of the subject company.  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 and consistent.  Readers are strongly encouraged to verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post 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 analytical approach, the criteria used, and all calculations are subject to change without notification.

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 #caterpillar    #cat    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

CAT: Earnings Report for the Quarter Ending December 31, 2020

Caterpillar reported before the market opened on January 29, 2021, it earned $1.42 per diluted share in the quarter that ended on December 31, 2020, down 28 percent from earnings of $1.97 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Adjusted Profits, a non-GAAP figure, fell 22 percent to $2.12 per share from $2.71 one year earlier, a decline not as steep change than the GAAP percentage. The exclusions responsible for the $0.70 per share difference in the latest quarter between the GAAP and Non-GAAP earnings were: Pension mark-to-market  [$0.63 per share], and Restructuring costs [$0.07 per share].  Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits.

This post compares the quarterly Income Statement published by Caterpillar to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by Caterpillar's management to financial analysts, news reports, and trends in the company's historical results.  Unless otherwise mentioned, all reported values mentioned below are GAAP figures.

First, a little background about the company:  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.

The following table is a simplified version of Caterpillar's Income Statement for the quarter that ended in December 2020, with company-reported numbers along side my predictions.  Figures from the year-earlier quarter are also provided for comparative purposes.

Revenue in the December 2020 quarter totaled $11.2 billion, 15 percent less than last year. The Construction Industries business was responsible for 40 percent of overall revenue, and this unit's revenue percent fell by 10.2 percent compared to the year-earlier result. The Resource Industries business contributed 19 percent of revenue, and this unit's revenue decreased by 9.0 percent. The Energy & Transportation unit supplied 43 percent of revenue, and this business's revenue fell by 19.1 percent.

I was expecting Caterpillar to report revenue of $10.7 billion for the December 2020 quarter.  The actual amount surpassed my estimate by $535.0 million (5.0 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $7.8 billion in the latest quarter, which translates into a Gross Margin of 30.7 percent of revenue.  I was expecting the Gross Margin to be 30.3 percent in the December 2020 quarter, and Caterpillar exceeded that prediction by 0.5 percent.

Caterpillar spent $374 million on Research and Development in the latest quarter, down from $386 million one year ago. I had estimated that R&D expenses would be $374 million.  R&D was 3.3 percent of Revenue.

Sales, General, and Administrative expenses totaled $1.2 billion in the December 2020 quarter, down 5.2 percent from one year ago.  SG&A expenses increased from 9.8 percent to 10.8 percent of quarterly revenue, which shows Caterpillar spent more per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 10.5 percent of revenue, and the actual percentage turned out to be higher than the prediction.

The last operating expense line on the Income Statement is where the sum of other operating income and charges, such as restructuring, may be listed.  For Caterpillar the amount listed on this line was a $481 million loss in the latest quarter.  I was expecting a net loss of $482 million.

Caterpillar's Operating Income was $1.4 billion in the quarter, down 25.4 percent from the year-earlier period.  Operating Income exceeded my $1.3 billion estimate by $123 million.

Interest and other non-operating items summed to a net expense of $439 million.  My estimate for non-operating items was $508 million.

The effective income tax rate fell by 2.5 percent to 17.7 percent, which had a positive effect on net income.  I expected the tax rate to be 25.2 percent.

Net income attributable to Caterpillar was $780 million, $1.42 per share in the quarter ending December 2020.  The figures for the year-earlier quarter were $1.1 billion, $1.97/share. My earnings estimate for  the latest quarter was $556 million ($1.02/share), so Caterpillar earned $0.40 per share more than I had predicted.

In conclusion, the following list shows where the reported results differed from my expectations:

      – Better than expected:  Revenue growth + Misc non-operating items + Income tax rate + Non-controlling interests 

      – Worse than expected:  SG&A + Interest 

      – Near expectations:  Gross Margin + R&D + SG&A/Revenue + Special operating items 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

 #caterpillar    #cat    #gauges  #gcfr  #gcfr2 #QtrlyRpt   #nac_financialanalysis

CAT: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Caterpillar's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between. 

Once the company’s official results become available on January 29, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about Caterpillar.

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.  Not surprisingly, the slowdown induced by COVID-19 took a significant bite out of Caterpillar's sales in 2020.  Prospects for 2021 seem better.

With a market value of about $100 billion on a fully diluted basis, Caterpillar is included 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 indices.

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.

Revenue in the September quarter totaled $9.9 billion, 23% less than last year's $12.8 billion. The Construction Industries business was responsible for 41% of overall revenue, and this unit's revenue fell by 23.3% compared to the year-earlier result. The Resource Industries business contributed 18% of revenue, and this unit's revenue fell by 21.4%. The Energy & Transportation unit supplied 42% of revenue, and the amount fell by 23.7%.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

Caterpillar's management communicated their expectations for the December 2020 quarter last October. This is a start, but it's not specific enough for my purposes.

This guidance is augmented by the monthly retail statistics published by Caterpillar; e.g., the November data shows that worldwide sales of machines were down by 11 percent.  See https://investors.caterpillar.com/financials/retail-statistics/default.aspx 

A data point that may not carry much weight in this unusual year is that Caterpillar's fourth-quarter revenues in recent years have, on average, been about 5.5 percent higher than revenue in the preceding quarter.

The following baseline Income Statement tries to take into account the factors mentioned above and other historical results.  I wouldn't say I have a whole lot of confidence in these figures, but they seem reasonable based on the information I have.  Earnings are estimated at $556 million ($1.02 per share).

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

#cat #caterpillar #lookahead #gcfr #gcfr2 #gauges

Caterpillar: Gauge Analysis (updated November 4, 2020)

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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 #caterpillar    #cat    #valueinvesting    #nac_financialanalysis