Stock Analysis on Net

Caterpillar Inc. (NYSE:CAT)

Present Value of Free Cash Flow to Equity (FCFE) 

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In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.


Intrinsic Stock Value (Valuation Summary)

Caterpillar Inc., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 11.57%
01 FCFE0 6,672
1 FCFE1 7,751 = 6,672 × (1 + 16.17%) 6,947
2 FCFE2 8,785 = 7,751 × (1 + 13.34%) 7,057
3 FCFE3 9,708 = 8,785 × (1 + 10.51%) 6,990
4 FCFE4 10,453 = 9,708 × (1 + 7.67%) 6,746
5 FCFE5 10,959 = 10,453 × (1 + 4.84%) 6,339
5 Terminal value (TV5) 170,683 = 10,959 × (1 + 4.84%) ÷ (11.57%4.84%) 98,721
Intrinsic value of Caterpillar Inc. common stock 132,800
 
Intrinsic value of Caterpillar Inc. common stock (per share) $251.56
Current share price $196.84

Based on: 10-K (reporting date: 2021-12-31).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.


Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 3.27%
Expected rate of return on market portfolio2 E(RM) 12.25%
Systematic risk of Caterpillar Inc. common stock βCAT 0.92
 
Required rate of return on Caterpillar Inc. common stock3 rCAT 11.57%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rCAT = RF + βCAT [E(RM) – RF]
= 3.27% + 0.92 [12.25%3.27%]
= 11.57%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Caterpillar Inc., PRAT model

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Average Dec 31, 2021 Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017
Selected Financial Data (US$ in millions)
Dividends declared 2,374  2,247  2,210  1,985  1,845 
Profit attributable to common stockholders 6,489  2,998  6,093  6,147  754 
Sales of Machinery, Energy & Transportation 48,188  39,022  50,755  51,822  42,676 
Total assets 82,793  78,324  78,453  78,509  76,962 
Equity attributable to common shareholders 16,484  15,331  14,588  14,039  13,697 
Financial Ratios
Retention rate1 0.63 0.25 0.64 0.68 -1.45
Profit margin2 13.47% 7.68% 12.00% 11.86% 1.77%
Asset turnover3 0.58 0.50 0.65 0.66 0.55
Financial leverage4 5.02 5.11 5.38 5.59 5.62
Averages
Retention rate 0.55
Profit margin 9.36%
Asset turnover 0.59
Financial leverage 5.34
 
FCFE growth rate (g)5 16.17%

Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).

2021 Calculations

1 Retention rate = (Profit attributable to common stockholders – Dividends declared) ÷ Profit attributable to common stockholders
= (6,4892,374) ÷ 6,489
= 0.63

2 Profit margin = 100 × Profit attributable to common stockholders ÷ Sales of Machinery, Energy & Transportation
= 100 × 6,489 ÷ 48,188
= 13.47%

3 Asset turnover = Sales of Machinery, Energy & Transportation ÷ Total assets
= 48,188 ÷ 82,793
= 0.58

4 Financial leverage = Total assets ÷ Equity attributable to common shareholders
= 82,793 ÷ 16,484
= 5.02

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.55 × 9.36% × 0.59 × 5.34
= 16.17%


FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (103,914 × 11.57%6,672) ÷ (103,914 + 6,672)
= 4.84%

where:
Equity market value0 = current market value of Caterpillar Inc. common stock (US$ in millions)
FCFE0 = the last year Caterpillar Inc. free cash flow to equity (US$ in millions)
r = required rate of return on Caterpillar Inc. common stock


FCFE growth rate (g) forecast

Caterpillar Inc., H-model

Microsoft Excel
Year Value gt
1 g1 16.17%
2 g2 13.34%
3 g3 10.51%
4 g4 7.67%
5 and thereafter g5 4.84%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 16.17% + (4.84%16.17%) × (2 – 1) ÷ (5 – 1)
= 13.34%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 16.17% + (4.84%16.17%) × (3 – 1) ÷ (5 – 1)
= 10.51%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 16.17% + (4.84%16.17%) × (4 – 1) ÷ (5 – 1)
= 7.67%