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 world’s leading manufacturer of construction and mining equipment, off-highway diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. Its reporting segments are: construction industries (40% sales/47% operating profit, or OP), resource industries (20% sales/19% OP), and energy & transportation (40% sales/34% OP). Market share approaches 20% across many products. Caterpillar operates a captive finance subsidiary to facilitate sales. The firm has global reach (46% US sales/54% ex-US). Construction skews more domestic, while the other divisions are more geographically diversified. An independent network of 156 dealers operates approximately 2,800 facilities, giving Caterpillar reach into about 190 countries for sales and support
Recent Performance
Over the past twelve months the share price is up 12.62%.
Source: Google Finance
Inputs
- Discount Rate: 8%
- Terminal Growth Rate: 2%
- WACC: 8%
Forecasted Free Cash Flows (FCFs)
| Year | FCF (billions) | PV(billions) |
| 2025 | 7.27 | 6.73 |
| 2026 | 7.8 | 6.69 |
| 2027 | 8.4 | 6.67 |
| 2028 | 9 | 6.62 |
| 2029 | 9.5 | 6.47 |
Terminal Value
Terminal Value = FCF * (1 + g) / (r – g) = 161.50 billion
Present Value of Terminal Value
PV of Terminal Value = Terminal Value / (1 + WACC)^5 = 109.91 billion
Present Value of Free Cash Flows
Present Value of FCFs = ∑ (FCF / (1 + r)^n) = 33.17 billion
Enterprise Value
Enterprise Value = Present Value of FCFs + Present Value of Terminal Value = 143.08 billion
Net Debt
Net Debt = Total Debt – Total Cash = 32.24 billion
Equity Value
Equity Value = Enterprise Value – Net Debt = 110.84 billion
Per-Share DCF Value
Per-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $229.96
Conclusion
| DCF Value | Current Price | Margin of Safety |
|---|---|---|
| $229.96 | $362.23 | -57.42% |
Based on the DCF valuation, the stock is overvalued. The DCF value of $229.96 per share is lower than the current market price of $362.23. The Margin of Safety is -57.42%.
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