hey YouTube I'm Jimmy in this video I'm
gonna walk through my analysis of
Caterpillar ticker symbol CAT this
continues our series where we're
analyzing all 30 stocks in the Dow Jones
Industrial Average with the ultimate
goal of taking that analysis and trying
to build a great portfolio this is the
fifth video in that series and you can
see a link to each of the other videos
in the description below so caterpillars
business is broken into two main
segments machinery and financial
products the financial product segment
is mostly just cat financial which
basically lets caterpillar provide
financial opportunities to their
customers and it's only about six or
seven percent of total revenue of
Caterpillar now the machinery segment is
actually called machinery energy and
transportation systems and it's further
broken down into construction industries
energy and transportation and resource
industries last year construction
industries accounted for about forty
five percent of total revenue energy and
transportation accounted for about 37
percent of revenue and eighteen percent
was by resource industries so
caterpillar segments are based on their
target customers so the construction
industry segment focuses on customers in
the infrastructure forestry mining and
building construction industries now
they have different products that focus
on different geographies as well for
example the customers in developing
economies often prefer a lower purchase
price so caterpillar has products
specifically designed to meet their
needs while in the developed economies
customers often prefer products that
have a lower cost to operate the machine
over the course of the product's entire
life the energy and transportation
segment goes after customers that are in
the oil and gas industry power
generation marine railroad and a few
other similar industries they sell
products like generators marine
propulsion systems gas turbines and
products along those lines
the resource industry segment focuses on
products in mining quarry waste and
material handling and their products are
used to extract copper iron ore coal oil
sands gold and
like that they sell things like
hydraulic shovels trucks landfill
compactors mining system and the list
goes on and on
okay so now we know what caterpillar
does now let's take a peek at their
financial performance so in recent
history
caterpillars revenue topped out in 2012
and declined every year until 2016 where
it looks like a might of bottomed out and
since then it has been growing nicely
the purple bar is the past 12 months and
the two green bars to the right well
they're analyst estimates for 2018 and
2019 now we can swap out that revenue
chart with an earnings per share chart
and we could see a similar story so the
primary difference to me is that we're
revenue topped out in 2012
it looks like earnings per share has
recovered nicely over the past 12 months
enough to surpass the 2012 EPS level and
EPS projections out to 2019 look like
caterpillar should be rolling along
nicely from a profit standpoint now what
makes this even more interesting is this
chart here this is net income margins
once again 2016 was a bad year from many
perspectives but since then it looks
like caterpillar is recovering nicely
and net income margins look great now I
will point one thing up this last blue
bar here this is 2017 the purple bar
which is the last four quarters includes
two quarters from 2017 and the first two
quarters of 2018 so that's real that
actually happened but the next two next
two green bars well they're just analyst
projections and it's important to keep
this in mind for now that for now these
are just estimates and to me these
estimates are one of the most
interesting parts of caterpillars whole
story are these projections just
analysts excitement and they're getting
caught up in the moment as margins have
already jumped almost 12% over the past
four quarters or are they real numbers I
don't even care if margins end up being
exactly what the analysts say I believe
that in 2018 they say it's 12.6%
profit margins in 2019 I believe it's
expected to be 12.7 but
either way if it's anywhere up in this
area that would be a good thing for
Caterpillar and for shareholders okay
that being said can we come up with a
fair value for Caterpillar stock I think
one important point that I uncovered in
my
research is that many of caterpillars
business segments well they appear to be
in the early innings of an uptrend some
good examples are industries like mining
offshore oil and gas u.s. construction
China construction and I think it's this
realization that there's still plenty of
upside that ultimately led to analysts
having such promising projections out
for the next couple of years so here's a
free cash flow valuation I put together
for Caterpillar stock so in a recent
video I did on Boeing I did a more
thorough review of how I came up with
the different numbers that go into
discounted cash flow analysis and if you
want to go back you can see that there's
a link to the disc in the description
below to that video and I start touching
on the discounted cash flow stuff at
about the four and a half minute mark so
if you want you can skip over to that
but basically what I said in that video
was that I like to be a bit more
conservative when it comes to trying to
come up with valuation so if I'm going
to rounded numbers I try to do it I try
to round them in a more conservative
direction so for Caterpillar stock
I used a WACC which is weighted
average cost of capital of about 9% for
Boeing I had used 9.5%
but don't forget that WACC is
very company specific it takes into
account both the debt of that company
and the estimated cost of that company's
equity so you can't just use the same
WACC all across the board for this
we're using nine percent now when I had
done the actual calculation it came
up to about eight point nine percent now
for a perpetual growth rate I use two
point five percent two point five
percent is the same one I used in Boeing
and that the perpetual growth rate
should be a bit more tied to the overall
future growth of the economy
and I think 2.5 percent is a fairly
conservative view I could have easily
made a case for three percent but once
again I like to be a bit more
conservative so two point five percent
it is now as you can see when we plug
all this in and discount projected cash
flows to today well it tells us that
caterpillar stock should be worth close
to one hundred ninety nine dollars per
share considering that it's trading at
about one hundred and fifty dollars a
share right now this looks like pretty
good upside to me
but what about some other valuation
methods discounted cash flow isn't the
only way to do it well if we look at p/e
multiples catechol stock is currently
trading at a forward p/e of about 12
times next year's earnings to put that
in perspective the sp500 is currently
trading at about 18 times next year's
earnings in fact if we look at
caterpillars own historical p/e multiple
we'll see that their five-year average
is about 18 times next year's earnings
and their ten-year average is about 16
times next year's earnings so by most
measures according to the p/e multiple
caterpillar looks like it's fairly
undervalued at 150 dollars right now
okay so out of those numbers let's take
the most conservative number and use 16
times forward earnings
well EPS estimates for the next four
quarters are a hair over $12 a share I
think it was actually about 12.07 so if
we take that twelve dollars and seven
cents multiply it by 16 times next year
earnings that would imply that the fair
value right now is about a hundred
ninety three dollars a share once again
with the current share price of about
$150 caterpillar looks like it's a
pretty good value right now so overall I
think caterpillar is a real potential to
make our ideal portfolio the fact that
the industry still seems poised for
growth puts caterpillar in a decent
position when it comes to our need to
identify long term great opportunities
but the real hole in our fair value
estimates both of which point to a fair
value closer to $200 compared to the
150 that its trading at today well
the assumption here is that analyst
estimates are correct and or at least in
the ballpark of correct and that may not
always be the case so ultimately what
each of us have to determine
individually is do we believe that
analyst estimates are least close going
on the next few years so my question for
you is what about your research does
your research tell you anything
different from what my research
uncovered let me know what you think in
the comments below
and if you haven't done so already feel
free to hit the subscribe button and
thank you for sticking around all the
way to the end and I'll see you in the
next video thanks