ModernGraham Quarterly Valuation Of Caterpillar Inc.

Jan.30.14 | About: Caterpillar Inc. (CAT)

In many respects, Caterpillar Inc. is the foundation of the construction industry. The company provides machinery to the industry, without which the industry would cease to function. From a pure conceptual standpoint, this could lead investors to the belief that the company is in such a great position that it must be a good investment; however, investment decisions must be grounded in fundamental analysis else they be merely speculation. Does Caterpillar present good value? Is it a solid company? These are the sort of questions investors must ask when reviewing a company for the potential for profit. By using a ModernGraham analysis, one can maintain a systematic analysis across companies and even industries to easily compare one potential investment's risk level and opportunity for value against another potential investment. What follows is a specific look at how Caterpillar Inc. fares in the ModernGraham valuation model.

Defensive and Enterprising Investor Tests:

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - PASS
  7. 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 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

MG Value $161.33
MG Opinion Undervalued
Value Based on 3% Growth $91.45
Value Based on 0% Growth $53.61
Market Implied Growth Rate 3.08%
Net Current Asset Value (NCAV) -$45.69
PEmg 14.66
Current Ratio 1.38
PB Ratio 3.25
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Balance Sheet - 9/30/2013

Current Assets $40,088,000,000
Current Liabilities $29,119,000,000
Total Debt $26,015,000,000
Total Assets $87,272,000,000
Intangible Assets $10,686,000,000
Total Liabilities $69,162,000,000
Outstanding Shares 636,360,000
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Earnings Per Share

2013 $5.75
2012 $8.48
2011 $7.40
2010 $4.15
2009 $1.43
2008 $5.66
2007 $5.37
2006 $5.17
2005 $4.04
2004 $2.88
2003 $1.56
2002 $1.15
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Earnings Per Share - ModernGraham

2013 $6.31
2012 $6.20
2011 $4.97
2010 $3.96
2009 $4.02
2008 $5.08
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Conclusion:

When we last looked at Caterpillar Inc. (previous review), it was suitable for both the Defensive Investor and the Enterprising Investor, and was undervalued. In the last 3 months the conclusion has not changed, though the market has brought the price up 9.72%. The company remains suitable for the Defensive Investor even though the current ratio is a bit too low, and the company is suitable for the Enterprising Investor by default due to its suitability for the Defensive Investor. As a result, value investors seeking to follow the ModernGraham method should feel comfortable proceeding with further research, perhaps through a review of ModernGraham's valuation of General Electric (NYSE:GE) or other companies that pass the ModernGraham requirements.

From a valuation perspective, the intrinsic value returned by the ModernGraham model has increased slightly since the last valuation due to the fact the actual earnings for 2013 were higher than estimated. The model returns a figure that indicates the market price is less than the intrinsic value, and the company appears to be undervalued. It should be noted that the market is currently implying a growth rate for earnings of 3.08%, which is well below the growth the company has demonstrated in recent years.

What do you think? What value would you put on Caterpillar Inc.? Is there a company you like better?

Disclosure: The author did not hold a position in Caterpillar Inc. (NYSE:CAT) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.