Is The Market Pricing Caterpillar Fairly?

Caterpillar (NASDAQ: CAT) enjoyed a solid finish to 2017 after a fairly challenging 2016. The company’s revenue grew by 18%, while its stock price jumped nearly 70% in 2017. The revenue growth was primarily due to improved sales volume, driven by increased end-user demand across most regions and markets. We expect these favorable conditions for Caterpillar to spill over into 2018, driven by the global outlook of the construction industry, improving commodities prices, and demand for oil & gas applications.

We have created an interactive dashboard analysis to estimate Caterpillar’s valuation based on its expected revenues for fiscal 2018. You can modify the key value drivers to see how they impact the company’s revenues, bottom line, and valuation.

Our $173 price estimate for Caterpillar, which is around 10% ahead of the market price, is based on a forecast of around $51 billion in revenue in FY’18 and an EBITDA margin of ~16%. We estimate a Price/EBITDA Multiple of 12.5.

Caterpillar generates revenue from five segments –  Construction Industry, Resource Industry, Energy & Transportation, Other Segments, and Financial Products. We expect growth in the former three to drive revenues for CAT going forward. The Construction Industry segment generates revenue from sales of construction equipment and services. Growing affluence and population, together with improved construction activities in developing markets – such as China and India – should drive spending. Meanwhile, the Resource Industry segment generates revenue from sales of mining equipment and services. Recovery in commodity prices should drive increased end-user demand, and emerging economies will continue to drive the growth of the Mining Industry.

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