Despite Caterpillar (CAT, Financial)'s daily loss of -5.36% and a 3-month loss of -13.11%, the stock's Earnings Per Share (EPS) (EPS) stand at 16.07. The question we aim to answer is whether the stock is modestly undervalued. This article will delve into a detailed analysis of Caterpillar's valuation, providing insights for potential investors.
Introducing Caterpillar Inc (CAT, Financial)
Caterpillar is the world's leading manufacturer of heavy equipment, power solutions, and locomotives, boasting a 13% market share in 2021. The company operates through four segments: construction industries, resource industries, energy and transportation, and Caterpillar Financial Services. Caterpillar's products are globally available through a dealer network of about 2,700 branches maintained by 160 dealers. Caterpillar Financial Services provides retail financing for machinery and engines to customers and wholesale financing for dealers, thereby increasing the likelihood of Caterpillar product sales.
Comparing the stock price of $229.18 with the GF Value of $288.64, we see a potential undervaluation. This comparison sets the stage for a deeper exploration of Caterpillar's value, combining financial assessment with essential company details.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value. It is calculated based on historical trading multiples, a GuruFocus adjustment factor derived from the company's past performance and growth, and future business performance estimates. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be traded.
If the stock price significantly exceeds the GF Value Line, it is overvalued, and its future returns are likely to be poor. Conversely, if the price is significantly below the GF Value Line, the stock may be undervalued, suggesting higher future returns. Caterpillar, with a market cap of $116.90 billion, appears to be modestly undervalued at its current price of $229.18 per share.
Given Caterpillar's relative undervaluation, the long-term return of its stock is likely to exceed its business growth.
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Assessing Caterpillar's Financial Strength
Checking the financial strength of a company is crucial before investing in its stock. Companies with poor financial strength pose a higher risk of permanent loss. Caterpillar's cash-to-debt ratio of 0.2 is lower than 73.56% of 208 companies in the Farm & Heavy Construction Machinery industry. Its overall financial strength is 6 out of 10, indicating fair financial health.
Profitability and Growth of Caterpillar
Investing in profitable companies, especially those with consistent long-term profitability, poses less risk. Caterpillar has been profitable 9 out of the past 10 years. With a revenue of $64.80 billion and an EPS of $16.07 in the past twelve months, its operating margin is 17.62%, ranking better than 90.87% of 208 companies in the Farm & Heavy Construction Machinery industry. Overall, Caterpillar's profitability ranks at 7 out of 10, indicating fair profitability.
Growth is a critical factor in a company's valuation. Caterpillar's 3-year average revenue growth rate is lower than 50.25% of 203 companies in the Farm & Heavy Construction Machinery industry, and its 3-year average EBITDA growth rate of 4.2% ranks lower than 60% of 180 companies in the industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) provides insights into its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If ROIC exceeds WACC, the company is likely creating value for its shareholders. Caterpillar's ROIC is 14.2, while its WACC is 9.98.
Conclusion
In conclusion, Caterpillar (CAT, Financial) appears to be modestly undervalued. The company's financial condition is fair, and its profitability is fair. However, its growth ranks lower than 60% of 180 companies in the Farm & Heavy Construction Machinery industry. For more information about Caterpillar stock, check out its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
