Here is a look at how Caterpillar, Inc. (NYSE:CAT) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:
Defensive and Enterprising Investor Tests (explanation)
Defensive Investor - must pass at least six of the following seven tests: Score = 6/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using three-year averages at beginning and end of period - PASS
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS
Enterprising Investor - must pass at least four of the following five tests: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
- Earnings Stability - positive earnings per share for at least five years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than five years ago - PASS
Valuation Summary (explanation):
| MG Value | $160 |
| MG Opinion | Undervalued |
| Value Based on 3% Growth | $91 |
| Value Based on 0% Growth | $53 |
| Market Implied Growth Rate | 2.48% |
| Net Current Asset Value (NCAV) | -$44.70 |
| PEmg | 13.46 |
| Current Ratio | 1.36 |
| PB Ratio | 3.09 |
Key Data
Balance Sheet - June 30, 2013
| Current Assets | $40,805,000,000 |
| Current Liabilities | $29,919,000,000 |
| Total Debt | $25,680,000,000 |
| Total Assets | $87,375,000,000 |
| Intangible Assets | $10,578,000,000 |
| Total Liabilities | $69,754,000,000 |
| Outstanding Shares | 647,620,000 |
Earnings Per Share - Diluted
| 2013 (estimate) | $5.45 |
| 2012 | $8.55 |
| 2011 | $7.48 |
| 2010 | $4.24 |
| 2009 | $1.32 |
| 2008 | $5.66 |
| 2007 | $5.37 |
| 2006 | $5.17 |
| 2005 | $4.04 |
| 2004 | $2.88 |
| 2003 | $1.56 |
| 2002 | $1.15 |
Earnings Per Share - Modern Graham
| 2013 (estimate) | $6.25 |
| 2012 | $6.25 |
| 2011 | $5.00 |
| 2010 | $3.96 |
| 2009 | $3.98 |
| 2008 | $5.08 |
Conclusion
Caterpillar is a very strong company based on its financials, and may be suitable for the defensive investor (and hence an enterprising investor as well). A prudent and intelligent investor should do more research, but it also appears that Caterpillar may be undervalued based on the amount of growth seen in its earnings per share over the last several years.
What do you think? Will Caterpillar continue to see earnings growth at a rate above the 2.5% the market is implying?
Disclosure: None.
