- Caterpillar is a global manufacturer of construction and mining equipment based in the US. It has three main business lines: machinery, engines, and financial products. - In 2010, Caterpillar saw sales increase 31% from 2009 as the global economy recovered. However, it still faces challenges from competition and economic uncertainty. - The analyst provides forecasts for Caterpillar's financials through 2015, estimating continued revenue growth. However, they recommend selling the stock due to risks from economic conditions and competitive pressures.

1. CAT (NYSE)
Cisco Martinez

2. • First established 1925 in California. Reorganized as Caterpillar Inc. in 1986
• Global conglomerate with a multitude of acquisitions and joint ventures
• New CEO in July 2010
• Three principle business: Machinery, Engines, Financial Products
• Sales spread across four global operating regions
• Based on Sales of $42.6 Billion USD, largest manufacturer of construction and
mining equipment in the world
• One of the United States’ leading exporters
38.5%
24.7%
22.7%
14.1%
2010 Sales by Geographic Region
North America
Asia/Pacific
Europe, Africa, and
Middle East
Latin America
65.2%
28.4%
6.4%
2010 Sales by Business Line
Machinery
Engines
Financial Products

3. • CAT competes in the Farm and Construction Machinery industry
• Highly competitive global environment
• Global recession cut demand in 2009
• Key contributors to revenue: commodity prices, housing market,
financial market, government infrastructure spending
Potential
Entry
Low Low due to high capital requirements
Substitutes Low Customers highly dependent on specific products and
technology
Supplier
Power
Low Competitive steel industry with global span – China
leading
Buyer Power Low Dealer network not concentrated: 50 US/138 outside US;
182 countries and 3,475 places of business
Rivalry High Products sold worldwide to competitive markets with
intense competition resulting in price discounting
Industry Forces Analysis LTM Stock Returns

4. • 2010 sales and revenues were 31% higher than in 2009
• Reported manufacturing costs improved $909 million from 2009
• Increased R&D in improved emission engines to meet regulations
• Improve product mix for higher margins
• Acquisitions:

5. Profitability: CAT
Gross Margin (TTM): 34.1%
Operating Margin (TTM): 11.5%
Profit Margin (TTM): 7.6%
CAT: ABOVE average profitability
Financial Strength: CAT
Quick Ratio (MRQ): 0.9
Current Ratio (MRQ): 1.4
Total Debt/Equity(MRQ): 2.6
CAT: BELOW average financial strength
Market Data
Current Price (4/15/2011): 107.21
52-week low: 54.89
52-week high: 113.93
Market Cap. ($M): 68,490
Shares Out. (M): 638.8
Beta: 1.77
Management
Effectiveness: CAT
ROE (TTM): 26.74%
ROA (TTM): 4.03%
ROIC (TTM): 8.60%
Asset Turnover: 0.7
A/R Turnover: 2.8
CAT: ABOVE average management effectiveness
TTM=Trailing 12 Months
MRQ=Most Recent Quarter

6. • MD&A reported Machinery and Engines debt-to-capital ratio reduced from 47.2%
in 2009 to 34.8% in 2010
• No improvement in cash flows to liabilites
Ratio 2010 2007
Oper Cash Flow/Total Liabilities 9.7% 17.3%
Oper Cash Flow/Current Liabilities 24.4% 37.7%
COGS/Sales 71.3% 72.6%
• Cost improvement

7. • No major issues from changes in accounting principle, impairment losses, and
extraordinary changes in cash flow not attributable to notes in 10-K
• 2009 LIFO liquidation decreased COGS $300M, increased profits $240M
• Receivables move steadily with revenues
• Economic downturn affected company ratios, but competitors performed similarly

8. • Short-term receivables correlate with sales
• Long-term receivables affected by recession and low interest rates

9. • Pension underfunding reduced $2.2 billion
• CAT contributed $812 million of company stock to plan assets

10. • Pension assets primarily Level 1

11. • Foreign exchange risk

12. • Revenue Growth Assumptions
• Summary Income Statement Data
2011E 2012E 2013E 2014E 2015E
Machinery $35,210 26.8% $40,897 16.2% $44,692 9.3% $47,512 6.3% $49,424 4.0%
Engines 13,468 11.3% 14,547 8.0% 15,298 5.2% 16,018 4.7% 17,091 6.7%
Financial Products 3,317 21.9% 3,771 13.7% 4,073 8.0% 4,309 5.8% 4,507 4.6%
Total $51,995 22.1% $59,215 13.9% $64,063 8.2% $67,839 5.9% $71,023 4.7%
Consolidated Results of Operations 12 Months Ended
In $ Millions, except Per Share data 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015
Total sales and revenues $42,588 $51,995 $59,215 $64,063 $67,839 $71,023
Total operating costs $38,625 $45,741 $50,852 $54,439 $57,082 $59,160
Operating profit $3,963 $6,254 $8,363 $9,624 $10,757 $11,863
Profit $2,700 $4,154 $5,632 $6,528 $7,342 $8,137
Profit per common share $4.28 $6.45 $8.66 $10.19 $11.63 $13.09
Profit per common share - diluted $4.15 $6.26 $8.41 $9.89 $11.29 $12.71
Cash dividends declared per common share $1.74 $1.84 $1.99 $2.15 $2.28 $2.42

13. • Summary Balance Sheet Data
• Summary Cash Flow Data
Consolidated Summary Statement of Cash Flow 12 Months Ended
In $ Millions 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015
Cash Flow from Operating Activities $2,987 $8,082 $10,506 $11,500 $12,850
Cash Flow from Investing Activities -$7,559 -$7,315 -$5,860 -$5,183 -$4,873
Cash Flow from Financing Activities $6,453 -$7 -$4,136 -$5,920 -$7,641
Increase (Decrease) in Cash & Short Term Invest $1,881 $760 $510 $397 $335
Cash and Short Term Investments - Beginning of Year 3,592 5,473 6,233 6,743 7,141
Cash and Short Term Investments - End of Year $5,473 $6,233 $6,744 $7,141 $7,476
Consolidated Financial Position 12 Months Ended
In $ Millions 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015
Total current assets $31,810 $38,299 $42,799 $45,521 $48,195 $50,447
Total assets $64,020 $75,788 $84,091 $89,112 $93,103 $96,017
Total current liabilities $22,020 $24,161 $26,251 $26,711 $26,736 $26,355
Total liabilities $52,695 $60,062 $64,907 $64,899 $62,527 $58,432
Total stockholders' equity $10,864 $15,288 $18,767 $23,817 $30,201 $37,228
Total liabilities, redeemable noncontrolling
interest and stockholders' equity
$64,020 $75,788 $84,091 $89,112 $93,103 $96,017

14. Cost of Equity Capital
$86.31 10.07% 11.07% 12.07% 13.07% 14.07%
3.00% $109.98 $93.49 $80.76 $70.66 $62.48
3.50% $115.38 $97.19 $83.37 $72.55 $63.86
4.00% $121.66 $101.41 $86.31 $74.64 $65.38
4.50% $129.07 $106.27 $89.63 $76.98 $67.06
5.00% $137.94 $111.93 $93.42 $79.60 $68.93
Continuing
GrowthRate
Cost of Equity 12.07%
Long-Term Growth Rate 4.00%
1 2 3 4 5 5
2011 2012 2013 2014 2015 Continuing
Free Cash Flows from Operations $1,106 $7,322 $9,996 $11,103 $12,515
Net Capital Expenditures -3,492 -3,734 -3,582 -3,437 -3,450
Net Additions to Finance Receivables -4,073 -3,238 -2,150 -1,683 -1,412
Debt Cash Flows 6,095 2,412 -1,787 -3,877 -5,199
Free Cash Flows for Common Equity -$364 $2,762 $2,477 $2,105 $2,453
Net Income 8,462
Increase in Assets -3,841
Increase in Liabilities 2,337
Free Cash Flows for Common Equity 6,959
PV of FCF for Common Equity -$325 $2,199 $1,760 $1,334 $1,388 $48,779
Total PV of FCF for Common Equity $55,134
Shares Outstanding (millions) 638.8
Share Value $86.31

15. Cost of Equity Capital
$94.45 9.07% 11.07% 12.07% 13.07% 14.07%
3.00% $140.95 $101.86 $88.90 $78.58 $70.19
3.50% $149.15 $105.56 $91.51 $80.47 $71.57
4.00% $158.97 $109.78 $94.45 $82.56 $73.09
4.50% $170.93 $114.64 $97.77 $84.90 $74.77
5.00% $185.83 $120.30 $101.56 $87.52 $76.64
Continuing
GrowthRate
Cost of Equity 12.07%
Long-Term Growth Rate 4.00%
1 2 3 4 5 5
2011 2012 2013 2014 2015 Continuing
Dividend $1,205 $1,320 $1,404 $1,460 $1,525
Less: Common Stock Issues -811 -515 -311 -247 -181
Plus: Common Stock Repurchases 0 3,602 3,031 2,601 2,806
Total Dividends to Common Equity $394 $4,407 $4,124 $3,813 $4,150
Continuing Cash Flow $6,959
Divided by: Perpetuity with Growth Factor 0.0807
Continuing Value at 12/31/2015 $86,233
Present Value $352 $3,509 $2,930 $2,417 $2,347 $48,779
Equity Value $60,334
Shares Outstanding 638.8
Value per Share $94.45

16. • Company guidance:
– 2011 and 2012 revenues, 2011 R&D expense, 2011 capital expenditures
• Turnover ratios:
– Current assets and current liabilities
• % of Sales:
– Operating expenses
• Detail analysis:
– PP&E, capital expenditures, depreciation, asset sales
• CAPM:
– Cost of equity capital
• Other:
– Excess cash flow used to repurchase shares and pay off debt
Cost of Equity Calculation
Risk-Free Rate 3.41%
Market Risk Premium 5.00%
Beta 1.77
Cost of Equity 12.26%

17. • Overall Opinion: SELL
• Key Risks Identified:
– Business highly sensitive to global industry economic conditions
– Rising input prices or shortages
– Disruptions or volatility in financial markets could limit liquidity for the
Caterpillar, customers, dealers, and suppliers
– Highly competitive environment could put downward pressure on pricing
– Synergies implied with recent acquisitions may not be fully realized
• Current market price overestimates medium term (3-5 years) revenue growth and
improvement in gross margin