Intrinsic value of Caterpillar - CAT

Previous Close

$113.92

  Intrinsic Value

$22.67

stock screener

  Rating & Target

str. sell

-80%

  Value-price divergence*

-140%

Previous close

$113.92

 
Intrinsic value

$22.67

 
Up/down potential

-80%

 
Rating

str. sell

 
Value-price divergence*

-140%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of CAT stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 66.3

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -18.03
  3.80
  3.92
  4.03
  4.13
  4.21
  4.29
  4.36
  4.43
  4.48
  4.54
  4.58
  4.62
  4.66
  4.69
  4.73
  4.75
  4.78
  4.80
  4.82
  4.84
  4.85
  4.87
  4.88
  4.89
  4.90
  4.91
  4.92
  4.93
  4.94
  4.94
Revenue, $m
  38,537
  40,001
  41,569
  43,244
  45,028
  46,925
  48,938
  51,073
  53,334
  55,725
  58,252
  60,921
  63,738
  66,708
  69,840
  73,141
  76,617
  80,278
  84,131
  88,186
  92,452
  96,940
  101,660
  106,622
  111,840
  117,325
  123,090
  129,149
  135,517
  142,207
  149,237
Variable operating expenses, $m
 
  24,458
  25,393
  26,392
  27,456
  28,587
  29,788
  31,061
  32,409
  33,835
  35,342
  36,332
  38,012
  39,784
  41,651
  43,620
  45,693
  47,876
  50,174
  52,592
  55,136
  57,813
  60,628
  63,587
  66,699
  69,970
  73,408
  77,022
  80,819
  84,809
  89,002
Fixed operating expenses, $m
 
  15,181
  15,561
  15,950
  16,349
  16,757
  17,176
  17,606
  18,046
  18,497
  18,959
  19,433
  19,919
  20,417
  20,928
  21,451
  21,987
  22,537
  23,100
  23,678
  24,270
  24,876
  25,498
  26,136
  26,789
  27,459
  28,145
  28,849
  29,570
  30,309
  31,067
Total operating expenses, $m
  38,039
  39,639
  40,954
  42,342
  43,805
  45,344
  46,964
  48,667
  50,455
  52,332
  54,301
  55,765
  57,931
  60,201
  62,579
  65,071
  67,680
  70,413
  73,274
  76,270
  79,406
  82,689
  86,126
  89,723
  93,488
  97,429
  101,553
  105,871
  110,389
  115,118
  120,069
Operating income, $m
  498
  362
  616
  902
  1,224
  1,581
  1,974
  2,407
  2,879
  3,393
  3,950
  5,156
  5,807
  6,508
  7,262
  8,070
  8,937
  9,865
  10,857
  11,916
  13,046
  14,251
  15,534
  16,899
  18,352
  19,896
  21,537
  23,279
  25,127
  27,089
  29,168
EBITDA, $m
  3,532
  2,864
  3,192
  3,558
  3,964
  4,411
  4,901
  5,435
  6,014
  6,642
  7,319
  8,049
  8,834
  9,676
  10,579
  11,545
  12,577
  13,678
  14,853
  16,105
  17,438
  18,855
  20,363
  21,964
  23,664
  25,469
  27,383
  29,413
  31,564
  33,843
  36,257
Interest expense (income), $m
  1,075
  1,149
  1,224
  1,306
  1,393
  1,486
  1,586
  1,691
  1,802
  1,921
  2,046
  2,178
  2,317
  2,464
  2,620
  2,783
  2,956
  3,138
  3,329
  3,531
  3,742
  3,966
  4,200
  4,447
  4,706
  4,979
  5,266
  5,567
  5,884
  6,217
  6,566
Earnings before tax, $m
  139
  -787
  -608
  -403
  -170
  94
  389
  716
  1,076
  1,472
  1,905
  2,978
  3,489
  4,043
  4,642
  5,287
  5,981
  6,727
  7,528
  8,386
  9,304
  10,285
  11,334
  12,453
  13,646
  14,917
  16,271
  17,711
  19,243
  20,872
  22,602
Tax expense, $m
  192
  0
  0
  0
  0
  25
  105
  193
  291
  398
  514
  804
  942
  1,092
  1,253
  1,427
  1,615
  1,816
  2,032
  2,264
  2,512
  2,777
  3,060
  3,362
  3,684
  4,028
  4,393
  4,782
  5,196
  5,635
  6,102
Net income, $m
  -67
  -787
  -608
  -403
  -170
  69
  284
  523
  786
  1,075
  1,391
  2,174
  2,547
  2,952
  3,388
  3,859
  4,366
  4,911
  5,495
  6,121
  6,792
  7,508
  8,274
  9,090
  9,961
  10,889
  11,878
  12,929
  14,048
  15,236
  16,499

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  7,168
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  74,704
  73,397
  76,274
  79,347
  82,620
  86,100
  89,795
  93,712
  97,860
  102,248
  106,885
  111,782
  116,950
  122,401
  128,148
  134,203
  140,582
  147,298
  154,368
  161,809
  169,637
  177,871
  186,531
  195,637
  205,211
  215,275
  225,854
  236,971
  248,654
  260,931
  273,830
Adjusted assets (=assets-cash), $m
  67,536
  73,397
  76,274
  79,347
  82,620
  86,100
  89,795
  93,712
  97,860
  102,248
  106,885
  111,782
  116,950
  122,401
  128,148
  134,203
  140,582
  147,298
  154,368
  161,809
  169,637
  177,871
  186,531
  195,637
  205,211
  215,275
  225,854
  236,971
  248,654
  260,931
  273,830
Revenue / Adjusted assets
  0.571
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
  0.545
Average production assets, $m
  18,291
  19,001
  19,745
  20,541
  21,388
  22,289
  23,246
  24,260
  25,334
  26,469
  27,670
  28,937
  30,275
  31,687
  33,174
  34,742
  36,393
  38,132
  39,962
  41,888
  43,915
  46,046
  48,288
  50,646
  53,124
  55,729
  58,468
  61,346
  64,370
  67,548
  70,888
Working capital, $m
  5,835
  13,120
  13,635
  14,184
  14,769
  15,391
  16,052
  16,752
  17,493
  18,278
  19,107
  19,982
  20,906
  21,880
  22,908
  23,990
  25,130
  26,331
  27,595
  28,925
  30,324
  31,796
  33,344
  34,972
  36,684
  38,483
  40,374
  42,361
  44,449
  46,644
  48,950
Total debt, $m
  36,783
  34,961
  37,303
  39,804
  42,468
  45,302
  48,309
  51,498
  54,874
  58,446
  62,220
  66,206
  70,413
  74,850
  79,528
  84,457
  89,650
  95,117
  100,872
  106,928
  113,300
  120,003
  127,052
  134,465
  142,258
  150,450
  159,061
  168,110
  177,621
  187,614
  198,114
Total liabilities, $m
  61,567
  59,745
  62,087
  64,588
  67,252
  70,086
  73,093
  76,282
  79,658
  83,230
  87,004
  90,990
  95,197
  99,634
  104,312
  109,241
  114,434
  119,901
  125,656
  131,712
  138,084
  144,787
  151,836
  159,249
  167,042
  175,234
  183,845
  192,894
  202,405
  212,398
  222,898
Total equity, $m
  13,137
  13,652
  14,187
  14,758
  15,367
  16,015
  16,702
  17,430
  18,202
  19,018
  19,881
  20,791
  21,753
  22,767
  23,835
  24,962
  26,148
  27,397
  28,713
  30,096
  31,552
  33,084
  34,695
  36,389
  38,169
  40,041
  42,009
  44,077
  46,250
  48,533
  50,932
Total liabilities and equity, $m
  74,704
  73,397
  76,274
  79,346
  82,619
  86,101
  89,795
  93,712
  97,860
  102,248
  106,885
  111,781
  116,950
  122,401
  128,147
  134,203
  140,582
  147,298
  154,369
  161,808
  169,636
  177,871
  186,531
  195,638
  205,211
  215,275
  225,854
  236,971
  248,655
  260,931
  273,830
Debt-to-equity ratio
  2.800
  2.560
  2.630
  2.700
  2.760
  2.830
  2.890
  2.950
  3.010
  3.070
  3.130
  3.180
  3.240
  3.290
  3.340
  3.380
  3.430
  3.470
  3.510
  3.550
  3.590
  3.630
  3.660
  3.700
  3.730
  3.760
  3.790
  3.810
  3.840
  3.870
  3.890
Adjusted equity ratio
  0.195
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186
  0.186

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -67
  -787
  -608
  -403
  -170
  69
  284
  523
  786
  1,075
  1,391
  2,174
  2,547
  2,952
  3,388
  3,859
  4,366
  4,911
  5,495
  6,121
  6,792
  7,508
  8,274
  9,090
  9,961
  10,889
  11,878
  12,929
  14,048
  15,236
  16,499
Depreciation, amort., depletion, $m
  3,034
  2,502
  2,577
  2,656
  2,741
  2,831
  2,927
  3,028
  3,135
  3,249
  3,369
  2,894
  3,028
  3,169
  3,317
  3,474
  3,639
  3,813
  3,996
  4,189
  4,391
  4,605
  4,829
  5,065
  5,312
  5,573
  5,847
  6,135
  6,437
  6,755
  7,089
Funds from operations, $m
  6,236
  1,715
  1,968
  2,253
  2,571
  2,900
  3,210
  3,551
  3,921
  4,324
  4,760
  5,068
  5,575
  6,120
  6,706
  7,334
  8,006
  8,724
  9,491
  10,310
  11,183
  12,113
  13,102
  14,155
  15,274
  16,462
  17,724
  19,064
  20,485
  21,991
  23,588
Change in working capital, $m
  628
  480
  514
  549
  585
  622
  661
  700
  741
  784
  829
  875
  924
  974
  1,027
  1,082
  1,140
  1,201
  1,264
  1,330
  1,399
  1,472
  1,548
  1,628
  1,711
  1,799
  1,891
  1,987
  2,088
  2,195
  2,306
Cash from operations, $m
  5,608
  1,234
  1,454
  1,704
  1,986
  2,277
  2,550
  2,850
  3,180
  3,539
  3,931
  4,192
  4,651
  5,146
  5,679
  6,251
  6,865
  7,523
  8,228
  8,980
  9,784
  10,641
  11,554
  12,527
  13,562
  14,663
  15,834
  17,077
  18,396
  19,797
  21,282
Maintenance CAPEX, $m
  0
  -1,829
  -1,900
  -1,975
  -2,054
  -2,139
  -2,229
  -2,325
  -2,426
  -2,533
  -2,647
  -2,767
  -2,894
  -3,028
  -3,169
  -3,317
  -3,474
  -3,639
  -3,813
  -3,996
  -4,189
  -4,391
  -4,605
  -4,829
  -5,065
  -5,312
  -5,573
  -5,847
  -6,135
  -6,437
  -6,755
New CAPEX, $m
  -2,928
  -710
  -745
  -795
  -847
  -901
  -957
  -1,014
  -1,074
  -1,136
  -1,200
  -1,268
  -1,338
  -1,411
  -1,488
  -1,568
  -1,651
  -1,739
  -1,830
  -1,926
  -2,027
  -2,132
  -2,242
  -2,357
  -2,478
  -2,605
  -2,738
  -2,878
  -3,024
  -3,178
  -3,339
Cash from investing activities, $m
  -1,760
  -2,539
  -2,645
  -2,770
  -2,901
  -3,040
  -3,186
  -3,339
  -3,500
  -3,669
  -3,847
  -4,035
  -4,232
  -4,439
  -4,657
  -4,885
  -5,125
  -5,378
  -5,643
  -5,922
  -6,216
  -6,523
  -6,847
  -7,186
  -7,543
  -7,917
  -8,311
  -8,725
  -9,159
  -9,615
  -10,094
Free cash flow, $m
  3,848
  -1,304
  -1,191
  -1,066
  -915
  -762
  -636
  -488
  -320
  -130
  83
  158
  419
  707
  1,022
  1,366
  1,740
  2,145
  2,584
  3,058
  3,568
  4,118
  4,708
  5,341
  6,019
  6,746
  7,522
  8,352
  9,237
  10,182
  11,188
Issuance/(repayment) of debt, $m
  -1,310
  2,119
  2,342
  2,501
  2,664
  2,833
  3,008
  3,189
  3,376
  3,571
  3,775
  3,986
  4,207
  4,437
  4,678
  4,929
  5,192
  5,467
  5,755
  6,056
  6,372
  6,703
  7,049
  7,412
  7,793
  8,192
  8,611
  9,050
  9,510
  9,993
  10,500
Issuance/(repurchase) of shares, $m
  -23
  1,302
  1,143
  975
  778
  579
  403
  206
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -1,313
  3,421
  3,485
  3,476
  3,442
  3,412
  3,411
  3,395
  3,376
  3,571
  3,775
  3,986
  4,207
  4,437
  4,678
  4,929
  5,192
  5,467
  5,755
  6,056
  6,372
  6,703
  7,049
  7,412
  7,793
  8,192
  8,611
  9,050
  9,510
  9,993
  10,500
Total cash flow (excl. dividends), $m
  2,507
  2,117
  2,294
  2,409
  2,527
  2,649
  2,776
  2,906
  3,056
  3,442
  3,858
  4,144
  4,626
  5,144
  5,700
  6,295
  6,932
  7,613
  8,339
  9,114
  9,941
  10,820
  11,757
  12,753
  13,812
  14,938
  16,133
  17,401
  18,747
  20,175
  21,688
Retained Cash Flow (-), $m
  1,672
  -1,302
  -1,143
  -975
  -778
  -647
  -687
  -729
  -771
  -816
  -862
  -911
  -961
  -1,014
  -1,069
  -1,126
  -1,186
  -1,249
  -1,315
  -1,384
  -1,456
  -1,532
  -1,611
  -1,694
  -1,781
  -1,872
  -1,968
  -2,068
  -2,173
  -2,283
  -2,399
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  815
  1,151
  1,435
  1,749
  2,002
  2,088
  2,178
  2,285
  2,626
  2,995
  3,233
  3,665
  4,130
  4,631
  5,169
  5,746
  6,363
  7,024
  7,730
  8,484
  9,289
  10,146
  11,060
  12,032
  13,066
  14,165
  15,334
  16,574
  17,891
  19,289
Discount rate, %
 
  9.10
  9.56
  10.03
  10.53
  11.06
  11.61
  12.19
  12.80
  13.44
  14.12
  14.82
  15.56
  16.34
  17.16
  18.02
  18.92
  19.86
  20.86
  21.90
  23.00
  24.15
  25.35
  26.62
  27.95
  29.35
  30.82
  32.36
  33.97
  35.67
  37.46
PV of cash for distribution, $m
 
  747
  959
  1,077
  1,172
  1,185
  1,080
  973
  871
  844
  800
  707
  646
  577
  504
  431
  359
  292
  232
  180
  135
  99
  70
  49
  32
  21
  13
  8
  5
  3
  1
Current shareholders' claim on cash, %
  100
  98.1
  96.5
  95.2
  94.2
  93.5
  93.0
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8
  92.8

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction, rental, quarry, aggregate, mining, waste, material handling, oil and gas, power generation, marine, rail, and industrial markets. Its Construction Industries segment offers backhoe, compact, track-type, small and medium wheel, knuckleboom, and skid steer loaders; small and medium track-type, and site prep tractors; mini, wheel, forestry, small, medium, and large track excavators; and motorgraders, pipelayers, telehandlers, cold planers, asphalt pavers, compactors, road reclaimers, and wheel and track skidders and feller bunchers. The company’s Resource Industries segment provides electric rope and hydraulic shovel, landfill and soil compactor, dragline, large wheel loader, machinery component, track and rotary drill, electronics and control system, work tool, hard rock vehicle and continuous mining system, scoop and hauler, wheel tractor scraper, large track-type tractor, and wheel dozer products; longwall, highwall, and continuous miners; and mining, off-highway, and articulated trucks. Its Energy & Transportation segment offers reciprocating engine powered generator set and engine, integrated system, turbine, centrifugal gas compressor, diesel-electric locomotive and component, and other rail-related products and services. The company’s Financial Products segment offers finance for Caterpillar equipment, machinery, and engines, as well as dealers; property, casualty, life, accident, and health insurance; and insurance brokerage services, as well as purchases short-term trade receivables. Its All Other operating segments provides parts distribution and digital investments services. The company was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986. The company was founded in 1925 and is headquartered in Peoria, Illinois.

FINANCIAL RATIOS  of  Caterpillar (CAT)

Valuation Ratios
P/E Ratio -997.2
Price to Sales 1.7
Price to Book 5.1
Price to Tangible Book
Price to Cash Flow 11.9
Price to Free Cash Flow 24.9
Growth Rates
Sales Growth Rate -18%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -10.2%
Cap. Spend. - 3 Yr. Gr. Rate -8%
Financial Strength
Quick Ratio 1
Current Ratio 0
LT Debt to Equity 173.7%
Total Debt to Equity 280%
Interest Coverage 1
Management Effectiveness
Return On Assets -0.6%
Ret/ On Assets - 3 Yr. Avg. 2.4%
Return On Total Capital -0.1%
Ret/ On T. Cap. - 3 Yr. Avg. 2.9%
Return On Equity -0.5%
Return On Equity - 3 Yr. Avg. 9.5%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 26.5%
Gross Margin - 3 Yr. Avg. 27.1%
EBITDA Margin 11%
EBITDA Margin - 3 Yr. Avg. 13.5%
Operating Margin 1.3%
Oper. Margin - 3 Yr. Avg. 5.1%
Pre-Tax Margin 0.4%
Pre-Tax Margin - 3 Yr. Avg. 4.5%
Net Profit Margin -0.2%
Net Profit Margin - 3 Yr. Avg. 3.2%
Effective Tax Rate 138.1%
Eff/ Tax Rate - 3 Yr. Avg. 62.2%
Payout Ratio -2685.1%

CAT stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the CAT stock intrinsic value calculation we used $38537 million for the last fiscal year's total revenue generated by Caterpillar. The default revenue input number comes from 2016 income statement of Caterpillar. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our CAT stock valuation model: a) initial revenue growth rate of 3.8% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 9.1%, whose default value for CAT is calculated based on our internal credit rating of Caterpillar, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Caterpillar.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of CAT stock the variable cost ratio is equal to 61.2%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $14811 million in the base year in the intrinsic value calculation for CAT stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Caterpillar.

Corporate tax rate of 27% is the nominal tax rate for Caterpillar. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the CAT stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for CAT are equal to 47.5%.

Life of production assets of 10 years is the average useful life of capital assets used in Caterpillar operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for CAT is equal to 32.8%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $13137 million for Caterpillar - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 581.761 million for Caterpillar is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Caterpillar at the current share price and the inputted number of shares is $66.3 billion.

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COMPANY NEWS

▶ Nasdaq, S&P 500 Turn North; Caterpillar Gains 1%   [12:09PM  Investor's Business Daily]
▶ Trump Hasn't Sunk Infrastructure Stocks...Yet   [Aug-17-17 06:30PM  TheStreet.com]
▶ Behind Deeres Valuations ahead of Its Fiscal 3Q17 Results   [Aug-16-17 09:07AM  Market Realist]
▶ Caterpillar names new general counsel   [Aug-15-17 03:05PM  American City Business Journals]
▶ Trump fires back after Merck CEO quits advisory council   [Aug-14-17 01:30PM  Yahoo Finance Video]
▶ Charlottesville attacks prompt Airbnb, Twitter action   [01:30PM  Yahoo Finance Video]
▶ How Caterpillar Makes Its Money   [08:16AM  Motley Fool]
▶ As Wisconsin cheeses up $3B for Foxconn see the companies Arizona is giving $10M to   [Aug-03-17 05:15PM  American City Business Journals]
▶ Caterpillar: Let's Raise That Target!   [Aug-02-17 11:18AM  Barrons.com]
▶ [$$] Caterpillar Finance Chief to Retire   [08:18AM  The Wall Street Journal]
▶ Caterpillar CFO announces retirement   [07:17AM  MarketWatch]
▶ Top Stock Picks for the Week of July 31st   [Jul-31-17 03:39PM  Zacks]
▶ Caterpillar: Now You Upgrade It?   [10:07AM  Barrons.com]
▶ [$$] US blue-chip revenue growth beats expectations   [Jul-27-17 12:56PM  Financial Times]
▶ Caterpillar Won't Be Buried, Yet   [03:31PM  TheStreet.com]
▶ Caterpillar Could Inch Higher   [09:39AM  TheStreet.com]
▶ Caterpillar tops Street 2Q forecasts   [09:56PM  Associated Press]
▶ [$$] Caterpillar Boosts Outlook Signaling Cautious Optimism   [08:20PM  The Wall Street Journal]
Stock chart of CAT Financial statements of CAT
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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