We've been asking ourselves recently if the market has placed a fair valuation on Caterpillar. Let's dive into some of the fundamental values of this large-cap Industrials company to determine if there might be an opportunity here for value-minded investors.
Caterpillar Is Fairly Priced to Earnings but Overpriced Compared to Its Book Value:
Caterpillar Inc. manufactures and sells construction and mining equipment, off-highway diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives in the United States and internationally. The company belongs to the Industrials sector, which has an average price to earnings (P/E) ratio of 22.19 and an average price to book (P/B) ratio of 4.06. In contrast, Caterpillar has a trailing 12 month P/E ratio of 16.2 and a P/B ratio of 7.1.
P/E rations can be placed into context by dividing them by the firm's expected 5-year EPS growth rate, which gives us its Price to Earnings Growth (PEG) ratio. Caterpillar's PEG ratio is 1.09, which tells us the company is fairly valued in terms of growth. PEG ratios under 1 are considered an indicator of undervalued growth, but we need to keep in mind that many successful companies with excellent share performance have maintained much higher PEG ratios.
As always, a quantitative approach to a stock should be supplemented with a look at qualitative factors, such as the competence of its management team, quality of its corporate culture, and the wide variety of social and economic factors that can impact the success of its product.
Overview of the Company's Finances:
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $54,722 | $53,800 | $41,748 | $50,971 | $59,427 | $66,587 |
| Revenue Growth | n/a | -1.68% | -22.4% | 22.09% | 16.59% | 12.05% |
| Operating Margins | 15% | 15% | 11% | 16% | 15% | 18% |
| Net Margins | 11% | 11% | 7% | 13% | 11% | 14% |
| Net Income (MM) | $6,148 | $6,094 | $3,003 | $6,493 | $6,705 | $9,113 |
| Net Interest Expense (MM) | -$67 | -$57 | -$44 | $1,814 | $1,291 | $890 |
| Depreciation & Amort. (MM) | $2,766 | $2,577 | $2,432 | $2,352 | $2,219 | $2,157 |
| Earnings Per Share | $10.26 | $10.74 | $5.46 | $11.83 | $12.64 | $17.64 |
| EPS Growth | n/a | 4.68% | -49.16% | 116.67% | 6.85% | 39.56% |
| Diluted Shares (MM) | 599 | 568 | 549 | 548 | 530 | 477 |
| Free Cash Flow (MM) | $5,282 | $5,856 | $5,349 | $6,105 | $6,470 | $10,132 |
| Capital Expenditures (MM) | $1,276 | $1,056 | $978 | $1,093 | $1,296 | $1,489 |
| Current Ratio | 1.37 | 1.47 | 1.53 | 1.46 | 1.39 | 1.45 |
| Total Debt (MM) | $36,193 | $37,146 | $35,556 | $36,189 | $35,497 | $35,023 |
Caterpillar has weak revenue growth and increasing reinvestment in the business and positive EPS growth. Additionally, the company's financial statements display irregular cash flows and healthy leverage. Furthermore, Caterpillar has average net margins with a stable trend.
