CAT Details

Caterpillar Inc. (NYSE: CAT) is engaged in the business of manufacturing construction and mining equipment. It also develops diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives.

Robust Performance in Q2FY21 (For the Period Ended 30 June 2021)

• The company has recorded 29% YoY growth in sales and revenues to $12.9 billion driven by higher sales volume. Robust demand from end-user for equipment and services and the effect of changes in dealer inventories aided volume growth.
• Operating profit margin improved to 13.9% in Q2FY21 from 7.8% in Q2FY20.
• Profit per share during the period rose to $2.56 from $0.84 profit per share in Q2FY20. While the adjusted profit per share stood at $2.60 compared to the adjusted profit per share of $1.27 in Q2FY20.
• The enterprise operating cash flow stood at $4.0 billion in H1FY21 with the enterprise cash at the end of the period stood at $10.8 billion.

Key Data (Source: Company Report) 

Key Updates

• Acquired CarbonPoint Solutions: As per the release dated 10^th September 2021, the company stated that it has acquired Enhanced Energy Group, Inc. operating as ‘CarbonPoint Solutions’. This development will aid CAT in further lowering greenhouse gas emissions and will assist its customers to meet their climate-related objectives.
• Collaboration with Chevron: On 8^th September 2021, Chevron U.S.A. Inc., a subsidiary of Chevron Corporation and CAT announced a collaboration agreement to check the feasibility and performance of hydrogen for commercial purpose usage for line-haul rail and marine vessels as a substitute to traditional fuels.

Key Risks

The company’s operations are exposed to the risks of global and regional economic conditions.   Further, changes in commodity price as well as rise in material price and fluctuations in its products demand may impact its financial results. Any significant shortages of material and currency fluctuations also remain potential risks.

Outlook

Higher sales and revenues across all regions and in its three primary segments in Q2FY21 demonstrate sustained enhancement in its end markets. Further, the company continues to focus on serving its customers as well as implementing its strategy and investing for future profitable growth. Additionally, it boasts a strong balance sheet.  Overall, it has returned $0.8 billion to shareholders in Q2FY21 by way of dividends and share repurchases. CAT has enterprise cash of $10.8 billion at the end of Q2FY21.

Valuation Methodology: Price/Cash Flow Based Relative Valuation (Illustrative)

Stock Recommendation

CAT has delivered 3-months and 6-months returns of ~-7.81% and ~-10.65%, respectively. The stock is trading higher than the average of the 52-week high price of $246.58 and the 52-week low price of $142.73.

The stock has been valued using Price/Cash Flow Per Share multiple-based illustrative relative valuation and the target price so arrived reflects a fall of low double-digit (in % terms). A slight discount has been applied to Price/ Cash Flow Per Share Multiple (NTM) (Peer Average), considering its lower current ratio that stood at 1.56x in Q2FY21 compared to the Industry Median at 2.14x and lengthy cash conversion cycle at 179.8 Days in Q2FY21 versus Industry Median at 95.0 days.

Considering the aforementioned factors, the current trading levels, and the associated business risks, we advise the investors to book profits. Hence, we give a “Sell” rating at the stock price of $205.74 per share, (9:45 AM New York, NY, USA Time), as of 14^th September 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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