Caterpillar Is Undervalued

Caterpillar (CAT) the heavy machinery manufacturer has been hit hard on concerns about a global economic slowdown. Some analysts are however still bullish on the company. The stock is trading close to a 52-week low ($CAT has dropped nearly 50% in the last 12 months). How does the current share price look from an intrinsic value perspective?

Valuecruncher valuation model of $CAT with interactive assumptions

Valuecruncher produces a valuation of US$42.88 for $CAT. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 12.25% above the current share price of US$38.20.

Assumptions

• Revenue: Reuters aggregates 13 analysts covering $CAT and these analysts have mean estimates of 2008 and 2009 revenues of US$47.7 billion and US$51.6 billion respectively. For our analysis we have used US$47.0 billion in 2008, US$51.0 billion in 2009 and US$53.5 billion in 2010.
• Profitability: We have used an EBITDA margin of 14% to 2010. Reuters has $CAT‘s EBITD margin at 14.2% last year and 14.5% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of US$2.25 billion per annum moving forward.
• Discount Rate: 9.0%. You could make an argument for a discount rate anywhere in the 8-9% range.
• Terminal Growth Rate: 3.0%. If global economic conditions improve - this growth rate could be slightly higher (3.5-3.75%).

Our analysis incorporates the cash and debt the $CAT balance sheet – Valuecruncher calculates a net debt number.

Play with our assumptions – what does your analysis say?

View the full CAT chart at Wikinvest

Disclosure: None.

Comments

[Steven Hansen:]

historically cat grows during the early stages of recovery providing equipment to mining (commodities) and construction industries. we are entering a recession, and cat does not have a product line you need in a recession,

2008 Nov 02 05:51 AM

[Kamal Ahuja:]

Since CAT is considered to be a Cyciical company, I believe many analysts will try to call a "top" on earnings. The selloff in CAT's shares is a win for those analysts for now. Never mind that CAT is having their best year ever in terms of revenue growth. I further believe that the infra buildout in developing nations is far from over, and CAT could see sustained revenue growth in the coming years once the turmoil in the financial markets settles and credit eases. Commodity prices have already retracted from their recent highs, and this ought to lower CAT's material costs. I continue to be bullish on the sector at these valuation levels. I am long TEX, one of leading companies in the sector.

2008 Nov 03 01:04 AM

[Pj568:]

Besides your projected cash numbers did you also consider the current state of their lending operations since they have a significant role in financing their customers? What's their status on access to capital, renewal timeframes and cost of debt. What about bad debt expense and reserves? There is a lot more than a simple cash flow guestimate at work in the market today.

2008 Nov 03 01:20 AM