Caterpillar Stock Shows Every Sign Of Being Significantly Overvalued

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GF Value
Mar 28, 2021
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The stock of Caterpillar (NYSE:CAT, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $229.5 per share and the market cap of $125.1 billion, Caterpillar stock is estimated to be significantly overvalued. GF Value for Caterpillar is shown in the chart below.

Caterpillar GF Value Chart

Because Caterpillar is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 0.1% over the past five years.

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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Caterpillar has a cash-to-debt ratio of 0.25, which is worse than 75% of the companies in the industry of Farm & Heavy Construction Machinery. The overall financial strength of Caterpillar is 4 out of 10, which indicates that the financial strength of Caterpillar is poor. This is the debt and cash of Caterpillar over the past years:

debt and cash

It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Caterpillar has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $41.7 billion and earnings of $5.46 a share. Its operating margin is 10.91%, which ranks better than 77% of the companies in the industry of Farm & Heavy Construction Machinery. Overall, GuruFocus ranks the profitability of Caterpillar at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Caterpillar over the past years:

Revnue and Net Income

Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Caterpillar is 0.1%, which ranks in the middle range of the companies in the industry of Farm & Heavy Construction Machinery. The 3-year average EBITDA growth rate is 0.4%, which ranks in the middle range of the companies in the industry of Farm & Heavy Construction Machinery.

Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Caterpillar's return on invested capital is 5.88, and its cost of capital is 5.78. The historical ROIC vs WACC comparison of Caterpillar is shown below:

ROIC vs WACC

To conclude, the stock of Caterpillar (NYSE:CAT, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in the industry of Farm & Heavy Construction Machinery. To learn more about Caterpillar stock, you can check out its 30-year Financials here.

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