# Caterpillar Inc. (NYSE:CAT)

## Present Value of Free Cash Flow to the Firm (FCFF)

Intermediate level

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 the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

### Intrinsic Stock Value (Valuation Summary)

Caterpillar Inc., free cash flow to the firm (FCFF) forecast

US\$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 13.26%
01 FCFF0 6,216
1 FCFF1 5,660  = 6,216  × (1 + -8.94%) 4,998
2 FCFF2 5,398  = 5,660  × (1 + -4.63%) 4,209
3 FCFF3 5,381  = 5,398  × (1 + -0.31%) 3,704
4 FCFF4 5,597  = 5,381  × (1 + 4.00%) 3,401
5 FCFF5 6,062  = 5,597  × (1 + 8.31%) 3,253
5 Terminal value (TV5) 132,756  = 6,062  × (1 + 8.31%) ÷ (13.26%8.31%) 71,239
Intrinsic value of Caterpillar Inc.’s capital 90,804
Less: Debt (fair value) 40,037
Intrinsic value of Caterpillar Inc.’s common stock 50,767

Intrinsic value of Caterpillar Inc.’s common stock (per share) \$93.45
Current share price \$176.90

Based on: 10-K (filing date: 2020-02-19).

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.

### Weighted Average Cost of Capital (WACC)

Caterpillar Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 96,102  0.71 17.76%
Debt (fair value) 40,037  0.29 2.44% = 3.75% × (1 – 34.86%)

Based on: 10-K (filing date: 2020-02-19).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 543,258,283 × \$176.90 = \$96,102,390,262.70

Debt (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

Required rate of return on debt. See details »

Required rate of return on debt is after tax.

Estimated (average) effective income tax rate
= (22.40% + 23.70% + 67.20% + 35.00% + 26.00%) ÷ 5 = 34.86%

WACC = 13.26%

### FCFF Growth Rate (g)

#### FCFF growth rate (g) implied by PRAT model

Caterpillar Inc., PRAT model

Average Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US\$ in millions)
Interest expense excluding Financial Products 421  404  531  505  507
Profit (loss) attributable to common stockholders 6,093  6,147  754  (67) 2,102

Effective income tax rate (EITR)1 22.40% 23.70% 67.20% 35.00% 26.00%

Interest expense excluding Financial Products, after tax2 327  308  174  328  375
Add: Dividends declared 2,210  1,985  1,845  1,802  1,781
Interest expense (after tax) and dividends 2,537  2,293  2,019  2,130  2,156

EBIT(1 – EITR)3 6,420  6,455  928  261  2,477

Short-term borrowings 5,166  5,723  4,837  7,303  6,967
Long-term debt due within one year 6,210  5,830  6,194  6,662  5,879
Long-term debt due after one year 26,281  25,000  23,847  22,818  25,247
Equity attributable to common stockholders 14,588  14,039  13,697  13,137  14,809
Total capital 52,245  50,592  48,575  49,920  52,902
Financial Ratios
Retention rate (RR)4 0.60 0.64 -1.18 -7.15 0.13
Return on invested capital (ROIC)5 12.29% 12.76% 1.91% 0.52% 4.68%
Averages
RR -1.39
ROIC 6.43%

FCFF growth rate (g)6 -8.94%

Based on: 10-K (filing date: 2020-02-19), 10-K (filing date: 2019-02-14), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-15), 10-K (filing date: 2016-02-16).

2019 Calculations

2 Interest expense excluding Financial Products, after tax = Interest expense excluding Financial Products × (1 – EITR)
= 421 × (1 – 22.40%) = 327

3 EBIT(1 – EITR) = Profit (loss) attributable to common stockholders + Interest expense excluding Financial Products, after tax
= 6,093 + 327 = 6,420

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [6,4202,537] ÷ 6,420 = 0.60

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 6,420 ÷ 52,245 = 12.29%

6 g = RR × ROIC
= -1.39 × 6.43% = -8.94%

#### FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (136,139 × 13.26%6,216) ÷ (136,139 + 6,216) = 8.31%

where:
Total capital, fair value0 = current fair value of Caterpillar Inc.’s debt and equity (US\$ in millions)
FCFF0 = the last year Caterpillar Inc.’s free cash flow to the firm (US\$ in millions)
WACC = weighted average cost of Caterpillar Inc.’s capital

#### FCFF growth rate (g) forecast

Caterpillar Inc., H-model

Year Value gt
1 g1 -8.94%
2 g2 -4.63%
3 g3 -0.31%
4 g4 4.00%
5 and thereafter g5 8.31%

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)
= -8.94% + (8.31%-8.94%) × (2 – 1) ÷ (5 – 1) = -4.63%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -8.94% + (8.31%-8.94%) × (3 – 1) ÷ (5 – 1) = -0.31%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -8.94% + (8.31%-8.94%) × (4 – 1) ÷ (5 – 1) = 4.00%