Caterpillar Inc.

Date: June 13, 2024.

Company’s Overview

Caterpillar Inc. (CAT) is a global leader in construction and mining equipment. They design, manufacture, and sell machinery like bulldozers, excavators, loaders, and mining trucks. Their operations span worldwide, providing equipment for various infrastructure, construction, and resource extraction projects.

Competition

Revenue Segments

The Company’s net sales proportions by segment for the most recent quarterly report are composed by:

The Company’s Comparison of total net revenues by segment from 2019 till 2023:

Related Risks

Caterpillar faces a complex web of risks. Their business is cyclical, depending on global economic activity in construction and mining. A slowdown can drastically reduce demand for their equipment. The industry is fiercely competitive, demanding constant innovation and competitive pricing to maintain market share. Currency fluctuations and volatile commodity prices further complicate the picture, impacting profitability. Geopolitical instability in resource-rich regions can disrupt operations, while the financial health of their customers in construction and mining can affect their ability to pay for equipment.

Financial Performance

Company’s Revenues

Revenues from 2020 to 2023:

• CAT’s annual revenue for 2023 was $63.869B, a 12.89% increase from 2022.
• CAT’s annual revenue for 2022 was $56.574B, a 17.4% increase from 2021.
• CAT’s annual revenue for 2021 was $48.188B, a 23.49% increase from 2020.
• CAT’s annual revenue for 2020 was $39.022B, a -23.12% decrease from 2019.

The yearly revenue from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Company’s Net Income

Net Income from 2020 to 2023:

• CAT’s annual net income for 2023 was $10.335B, a 54.14% increase from 2022.
• CAT’s annual net income for 2022 was $6.705B, a 3.33% increase from 2021.
• CAT’s annual net income for 2021 was $6.489B, a 116.44% increase from 2020.
• CAT’s annual net income for 2020 was $2.998B, a -50.8% decrease from 2019.

The yearly net income from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Company’s EPS

EPS from 2020 to 2023:

• CAT’s annual EPS for 2023 was $20.24B, a 58.99% increase from 2022.
• CAT’s annual EPS for 2022 was $12.73B, a 6.71% increase from 2021.
• CAT’s annual EPS for 2021 was $11.93B, a 116.52% increase from 2020.
• CAT’s annual EPS for 2020 was $5.51B, a -49.22% decrease from 2019.

The yearly EPS from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Company’s Free Cash Flow

Free Cash Flow from 2020 to 2023:

• CAT’s annual free cash flow for 2023 was $9.793B, a 89.53% increase from 2022.
• CAT’s annual free cash flow for 2022 was $5.167B, a 9.33% increase from 2021.
• CAT’s annual free cash flow for 2021 was $4.726B, a 12.2% increase from 2020.
• CAT’s annual free cash flow for 2020 was $4.212B, a -0.73% decrease from 2019.

The yearly free cash flow from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Shares Outstanding

In February 2024, CAT’s board authorised a share repurchase program of up to $3.5B of its common shares.

The Company overall has decreased its shares outstanding by almost 19% from 2009.

Financial Strength

Their asset-to-liability ratio of 1.27 falls short of the ideal 2:1 benchmark. This indicates a somewhat limited buffer of assets compared to their debts. While not a critical issue, it suggests they might have less flexibility to weather unexpected financial challenges compared to companies with a higher ratio.

Similarly, their current ratio of 1.35 is slightly above the preferred level of 1. This means their current assets (like cash and inventory) are just quite enough to comfortably cover their current liabilities (like accounts payable) in the short term. However, it’s important to consider Caterpillar operates in the construction machinery industry, where it’s common to have a higher proportion of debt to finance the production of expensive equipment.

The net debt of $30.4 billion, while not ideal, is a more nuanced picture in Caterpillar’s case. While it remains a significant amount, the fact that it has decreased by 2% since 2019 shows a commitment to debt reduction. Additionally, the construction machinery industry is inherently capital-intensive, requiring substantial investment in manufacturing facilities and equipment. A higher debt level is somewhat more acceptable in this context, but ongoing debt reduction efforts are still important for Caterpillar’s long-term financial health.

Valuation

Based on the analysis performed, CAT’s price is modestly overvalued. As key metrics, we considered 8% Required Rate of Return (RRR) and 10% margin of safety. Note that in the analysis we take into consideration also the cash and cash equivalents and the total debt.

The company has received a range of ratings from buy to sell. Specifically, there were 9 buy, 1 overweight, 14 hold, 1 underweight and 2 sell ratings. The consensus rating leans toward hold.

Caterpillar presents a compelling case for investors, with some room for improvement on the financial side. While boasting impressive profitability metrics with industry-leading gross margins (35.17% vs 25.28% median) and net margins (16.79% vs 10.39% median), their financial strength is a minor concern. Their asset/liability (1.27) and current ratios (1.35) are slightly below ideal, indicating a somewhat limited buffer for unexpected challenges. The net debt of $30.4 billion is significant, but the positive aspects are that it represents only 46% of their liabilities and has decreased slightly since 2019. Additionally, a premium valuation (P/E ratio of 16.62 vs industry median of 15.64) seems reasonable considering their leadership position in construction machinery.

Financially, Caterpillar shines. Their revenue has grown 25% since 2019, and their 10-year CAGR for revenue, net income, and free cash flow are all positive, with net income and EPS leading the pack at 15.47% and 17.9% respectively. Their efficient capital allocation is evident in their high ROIC (17.25%). The moderate dividend (1.84%) consumes only 26% of their free cash flow, leaving room for reinvestment.

Despite some financial shortcomings, Caterpillar’s strong growth, profitability, and industry leadership make it a very attractive investment. While the financial ratios could be improved, the decreasing debt burden suggests a commitment to strengthening their financial health. Investors seeking a leader in construction machinery with a solid track record of growth and profitability should find Caterpillar appealing.

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Disclaimer

Please note that I am not a licensed financial advisor and the information provided here should not be construed as financial advice. I am simply sharing my understanding of the topics based on my research and personal experiences. It is always advisable to consult with a qualified financial advisor before making any investment decisions.

The information I provide is based on publicly available sources and my own interpretations. I strive to provide accurate and up-to-date information, but I cannot guarantee the correctness or completeness of the information.

Any opinions expressed here are my own and do not necessarily reflect the views of any other individual or organisation.

Please use your own judgement and conduct your own research before making any investment decisions.