Caterpillar (NYSE: CAT)
Quality Value Investing Research Report | $CAT Updated Coverage | August 2024
Premium (paying) subscribers can access the Quality Value Investing (QVI) Glossary of Investing Terms and Metric Targets and Research Report Format Guide when referencing this research report. Unless noted, all data presented is sourced from Charles Schwab & Co. as of the market close on August 19, 2024, and intended for illustration only.
In this updated coverage research report, we’ll reexamine the QVI Stock Picks Real-Time industrials sector holding, Caterpillar CAT 0.00%↑ to see if it continues to meet Quality Value Investing’s criteria based on our checklist analysis of the business’s current wealth and the share price’s present value.
Caterpillar | Current Wealth
Value Proposition
Caterpillar, Inc. is a dividend-paying large-cap stock in the industrials sector’s construction machinery & heavy transportation equipment industry. It was added to the QVI Real-Time Stock Picks on July 3, 2023, at $241.85 cost basis per share, adjusted for dividends.
Caterpillar, Inc. manufactures and sells construction and mining equipment, off-highway diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives in worldwide. The company was founded in 1925 and is headquartered in Irving, Texas USA.
Economic Moat
Morningstar assigns Caterpillar a wide moat rating, weighted towards its intangible assets and switching costs.
QVI’s Value Proposition Elevator Pitch for CAT:
Caterpillar is one of the world’s most valuable and recognizable brands that provides customers with reliable, high-quality products while offering the lowest total cost of ownership.
QVI’s value proposition rating for Caterpillar: Bullish.
Returns on Management
Revenue Growth and Net Profit Margin
Per the table below, Caterpillar’s trailing three-year annualized revenue growth was double-digit positive, in line with the S&P 500 topline growth of 18.90%. Moreover, the company’s revenue growth of +2.50% aligned with the broader market’s 4.50% for the most recently reported twelve months.
Further down the income statement, Caterpillar had a double-digit positive net profit margin from a 37.80% gross margin, outperforming the S&P 500’s 11.10% net from a 40.70% gross.
Returns on Equity and Invested Capital
Caterpillar senior management produced a high-double-digit return on equity, or ROE, more than tripling QVI’s targeted threshold and the S&P 500’s ROE of 18.40%.
Stock buyback programs often elevate ROE. For example, in June 2024, Caterpillar’s board of directors added $20 billion to its current share repurchase authorization, launched in 2022 with no expiration date. With the new approval, the company may repurchase up to $21.8 billion of its common stock. Caterpillar also said it expects to return substantially all the Machinery, Energy, & Transportation segment’s free cash flow to shareholders over time through dividends and share repurchases. (Source: Caterpillar, Inc).
Caterpillar’s return on invested capital, or ROIC, was above QVI’s threshold and aligned with the broader market’s 22.20% return. In addition, Caterpillar’s ROIC doubled its weighted average cost of capital, or WACC, demonstrating that its senior executives are adequate capital allocators. (Source of WACC: GuruFocus)
QVI’s business fundamentals rating for Caterpillar: Bullish.
Next, we’ll look at the company’s returns on management table, its enterprise downsize risks, the stock price’s present value, share price downside risks, and the investment thesis, each exclusive to Quality Value Investing’s premium (paying) subscribers.
Disclosure: As of the date of this research report, I/we had no beneficial position in CAT common shares in our family portfolio. I wrote this report myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this post.
Additional Disclosure: Quality Value Investing by David J. Waldron’s primary ticker research reports are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in independent research or due diligence and consider, as appropriate, consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.
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