Financial Performance: Caterpillar Caterpillar, the preeminent leader in the manufacture and supplier of earth moving equipment is the quintessential growth success story in the rapid economic globalization of the past three decades. Caterpillar's growth engine relies not just on the stable and dependability of the developed G-8 economies, but also in the inchoate opportunities presented by rapidly increasing developing economies such as Brazil, China, and South Africa. The Caterpillar narrative is one of competitive drive and dedication in providing superior manufacturing and industrial equipment to customers from small business to corporate giants to governmental entities. As global economic demand has increased tremendously over the past decades (notwithstanding the last years of the Great Recession), Caterpillar had delivered exceptional results for its customers, employees, and shareholders.

Company Overview

The Caterpillar name is synonymous with heavy-duty, rugged, and dependable earth-moving and industrial equipment. The company which has a presence on every continent "is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives" (Cat 2010). The company which had its start in the late century as a supplier of steam powered construction equipment, quickly branched out to incorporate multiple lines of business and product offerings. At the start of the second decade of the 21st century, Caterpillar has continued the growth which started over a century ago, and now has over 25 brands in their stable: from clean energy solar, to transportation rail logistics, to the ubiquitous backhoe and construction equipment seen at construction sites worldwide.

The company "operates in three principal lines of business: Machinery, Engines and Financial products" (CNBC.com. May 16, 2011) and is without question the dominant player in the construction and farm machinery industry; with revenues exceeding 42 billion in 2010 easily surpassing rivals Deere Cummins, and Komatsu with 26, 25, and 13 billion in revenues respectively (CNNMoney.com. 2011). The lines of business respectively generated revenue in 2010: machinery 27.7 billion, 12.1 billion engines, and 2.7 billion financial services (CNNMoney.com. 2011). With operations around the globe, Caterpillar remains a U.S. based multinational and is one of the country's leading exporters, accounting in 2010 for 13.4 billion dollar value (Caterpillar.com. 2010) The company's global presence is reflected in their strong revenue generation from developed and developing economic regions: North America 16 billion, Latin America six billion, Asia/Pacific 10.5 billion, and Europe/Africa, and Middle East 10.2 billion (Caterpillar.com. 2010).

Caterpillar's performance is driven by a variety of factors across a myriad of economic demographics: "higher demand for goods & services, increased urbanization rising energy consumption, higher demand for commodities, increased need for infrastructure, finite energy resources, more mining of commodities, increased construction equipment, and new energy solutions" (Caterpillar.com. 2010). Caterpillar has capitalized on these factors by positioning itself in developed and developing markets with emphasis on "delivering valued, quality products, services and solutions to our customers that provide the lowest total owning lifecycle costs. This, along with our unmatched customer support, creates the largest field population, highest customer loyalty and attractive profitability throughout the business cycle" (Caterpillar.com. 2010). Like the inexorable churn and advance of the global economy, so too will Caterpillar benefit from the continued demand cycles of an expanding global footprint. As CEO Doug Oberhelman articulates:

As we look to the future, a few things are clear -- the world's energy needs will continue to grow, countries and cities around the world will continue to develop and we will need ways to efficiently transport goods and services around the world. No matter what else happens, these needs will be there, and Caterpillar will be positioned to take advantage of growth and progress in our changing world (Caterpillar.com. 2010).

Ratio Analysis

From a financial perspective Caterpillar is a resoundingly profitable enterprise. On revenues of 42.5 billion the company generated operating profit of 3.9 billion and after tax profit of 2.7 billion (Caterpillar.com. 2010). In order to generate such high levels of revenue and profit the company must invest heavily in cap-ex and R&D, this spending accounting for 1.5 and 1.9 billion respectively (Caterpillar.com. 2010). The revenue generation is also concomitant with high COGS and expense levels: 28.7 and 6.6 billion respectively (Caterpillar.com. 2010). The financial health of an organization however, cannot be judged just by the top line revenues or bottom line profits, rather a ratio analysis covering key measures: valuation, financial strength, assets, and profitability can provide greater perspicuity into the company's position.

As indicated below the company has strong financial metrics. The valuation shows a company with a strong price to earnings ratio 18.92, in line with the overall market as referenced by the S&P 500 of 19.50. A price to sales ratio significantly higher than its competitors and the broad index which is indicative of strong stock performance, Lastly, a price to book ratio which outperforms the broader market, indicative of financial strength and asset value (CNBC.com. May 16, 2011).

The financial strength evidenced by a favorable quick and current ratio indicates solid liquidity. The long-term debt to equity is considerably higher than the industry average which may be a cause for concern however; liabilities do not dwarf assets which stand at 61 billion assets and 50 billion liabilities. Perhaps most impressive is a strong return on equity evidenced by outstanding net income results (CNBC.com. May 16, 2011).

Asset strength is evident by asset turnover "the efficiency with which assets are used to generate sales" and is in line with industry average. Inventory turnover looks at the firm's inventory management efficiency; in this case the figure demonstrates a fairly quick turn of inventories into sales (CNBC.com. May 16, 2011).

On profitability EBITDA (Earnings before Interest, Taxes, and Depreciation) is quite strong given total revenues and COGS. Most impressive is the gross profit margin which reflects profit after accounting for COGS. The figure is above industry standards (CNBC.com. May 16, 2011).

The recession of the last three years affected the metric trends of Caterpillar, as it did for most companies. From the financial statements 2011 should see a return to the revenues of 2007 prior to the recession, along with returns to pre-recession levels of net income and Earnings per Share. As the global economy continues its nascent recovery, Caterpillar will continue to improve on their financial ratios, strengthening them against industry rivals and the S&P 500 overall.

Key Measures

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VALUATION

CAT

Industry Average

Sector Average

S&P 500

Price/Earnings (TTM)

18.92

20.66

18.75

19.50

Price/Cash Flow

10.64

13.13

12.09

11.17

Price/Sales (TTM)

1.52

0.26

0.32

0.48

Price/Book

5.96

4.77

3.93

4.36

FINANCIAL STRENGTH

Quick Ratio (MRQ)

0.93

Current Ratio (MRQ)

1.44

1.89

1.76

1.79

LT Debt to Equity (MRQ)

35.59

89.04

38.67

Total Debt to Capital (MRQ)

94.29

46.55

Return On Equity

27.54

1.00

1.00

1.00

Return On Assets

5.86

4.98

5.94

9.00

Return On Invested Capital

8.64

9.93

11.60

14.39

ASSETS

Asset Turnover

0.69

0.81

0.88

0.77

Assets per Employee

$588.8K

$582.3K

$655.4K

$2.4M

Inventory Turnover

3.61

5.10

16.69

14.34

PROFITABILITY

EBITDA

$4.9B

$994.2M

$1.8B

$3.6B

Operating Margin

11.5%

10.3%

13.1%

20.0%

Profit Margin

6.3%

5.6%

6.4%

13.2%

Gross Profit Margin

27.1%

25.9%

32.3%

44.2%

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Balance Sheet Quarterly Annual

2010

12/31/10

2009

12/31/09

2008

12/31/08

2007

12/31/07

Cash

3,683

ASSETS

Cash & Short-Term Investments

3,683

4,867

2,736

1,122

Receivables - Net

16,792

13,912

18,128

15,752

Raw Materials

2,766

1,979

3,652

2,759

Work in Progress

1,483

1,107

1,215

Finished Goods

5,098

3,465

4,022

3,230

Progress Payments Other

0

0

Inventories - Total

9,587

6,360

8,781

7,204

Prepaid Expenses

Other Current Assets

1,748

1,650

1,988

1,399

CURRENT ASSETS - TOTAL

31,810

26,789

31,633

25,477

Land

Buildings

5,174

4,914

4,647

3,625

Machinery & Equipment

13,163

12,917

12,173

9,756

Rental/Leased Property

4,444

4,717

3,996

4,460

Property, Plant, & Equipment under Capitalized Leases

96

Property, Plant and Equipment - Gross

24,906

24,221

23,487

19,208

Accumulated Depreciation

(12,367)

(11,835)

(10,963)

(9,211)

Property, Plant and Equipment - Net

12,539

May 16, 2011).
Stock Price Analysis

CAT vs. S&P 500 Five-Year Trend

(CNBC.com. May 16, 2011)

Caterpillar stock has been a terrific holding for shareholders over the past few years. In 2010 the Dow component's "shares were up 64% leading the index" (Colvin, G. 2011). "Caterpillar is on such a tear that last year it even outran Wall Street darling Apple (AAPL) (not a Dow component), which was up a mere 53%" (Colvin, G. 2011). Analyzing a five-year chart of the S&P 500 versus Caterpillar stock the company underperformed the broader market up to the onset of the…