Each week we run a DCF (Discounted Cash Flow) model on a company from our watchlist. This week’s pick: Caterpillar Inc. (CAT).
Profile
Caterpillar is the world’s largest manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and locomotives. The company benefits from its global scale, durable brand, and broad dealer network that supports recurring parts and services revenue. While Caterpillar is cyclical, tied to commodity and infrastructure cycles, its robust free cash flow generation and disciplined capital allocation—including dividends and share repurchases—make it a favorite among value investors. Challenges include sensitivity to global economic slowdowns, supply chain disruptions, and competitive pricing pressure across heavy machinery markets.
DCF Analysis
Inputs
Discount Rate: 10%
Terminal Growth Rate: 3%
WACC: 10%
Forecasted Free Cash Flows (in billions USD)
2025: $8.0B → PV: $7.27B
2026: $8.4B → PV: $6.93B
2027: $8.8B → PV: $6.61B
2028: $9.2B → PV: $6.30B
2029: $9.6B → PV: $6.01B
Total Present Value of FCFs = $33.12B
Terminal Value Calculation
Using perpetuity growth model with 2029 FCF = $9.6B:
TV = (9.6 × 1.03) ÷ (0.10 − 0.03) = 141.2B
Present Value of Terminal Value = $88.47B
Enterprise Value
Enterprise Value = 33.12B + 88.47B = $121.59B
Net Debt
Cash: $6.89B
Total Debt: $38.41B
Net Debt = $31.52B
Equity Value & Per-Share Value
Equity Value = 121.59B − 31.52B = $90.07B
Shares Outstanding: ~478M
Intrinsic Value per Share = $188
Conclusion
DCF Value: $188
Current Price: ~$502
Margin of Safety: –63%
While Caterpillar generates consistent free cash flow and maintains a strong competitive moat in heavy machinery, our conservative DCF suggests the stock trades well above intrinsic value. For long-term value investors, CAT may be priced for cyclical strength and infrastructure optimism, leaving limited margin of safety at current levels.
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