As part of a new series, each week we typically conduct a DCF on one of the companies in our screens. This week we thought we’d take a look at one of the stocks that is not currently in our screens, Caterpillar Inc (CAT).
Profile
Caterpillar is the top manufacturer of heavy equipment, power solutions, and locomotives. It is currently the world’s largest manufacturer of heavy equipment. The company is divided into four reportable segments: construction industries, resource industries, energy and transportation, and Cat Financial. Its products are available through a dealer network that covers the globe with about 2,700 branches maintained by 160 dealers. Cat Financial provides retail financing for machinery and engines to its customers, in addition to wholesale financing for dealers, which increases the likelihood of Caterpillar product sales.
Recent Performance
Over the past twelve months the share price is up 46.50%.
Source: Google Finance
Inputs
- Discount Rate: 7%
- Terminal Growth Rate: 2%
- WACC: 7%
Forecasted Free Cash Flows (FCFs)
| Year | FCF (billions) | PV(billions) |
| 2024 | 7.27 | 6.79 |
| 2025 | 7.8 | 6.81 |
| 2026 | 8.37 | 6.83 |
| 2027 | 8.98 | 6.85 |
| 2028 | 9.63 | 6.87 |
Terminal Value
Terminal Value = FCF * (1 + g) / (r – g) = 196.45 billion
Present Value of Terminal Value
PV of Terminal Value = Terminal Value / (1 + WACC)^5 = 140.07 billion
Present Value of Free Cash Flows
Present Value of FCFs = ∑ (FCF / (1 + r)^n) = 34.16 billion
Enterprise Value
Enterprise Value = Present Value of FCFs + Present Value of Terminal Value = 174.22 billion
Net Debt
Net Debt = Total Debt – Total Cash = 32.97 billion
Equity Value
Equity Value = Enterprise Value – Net Debt = 141.25 billion
Per-Share DCF Value
Per-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $291.85
Conclusion
| DCF Value | Current Price | Margin of Safety |
|---|---|---|
| $291.85 | $394.05 | -35.02% |
Based on the DCF valuation, the stock is overvalued. The DCF value of $291.85 share is lower than the current market price of $394.05. The Margin of Safety is -35.02%.
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