Financial analysis and evaluation of Caterpillar, Inc.

Financial Research Report

This is a review of Caterpillar, Inc.. The report is broken down into three sections -- company overview, ratio analysis (which includes a trend analysis), stock price analysis -- that are designed to give a thorough overview of the complete company.

Company Overview

Caterpillar is one of the best known name brands, around the world for its manufacture of heavy machinery made, primarily, for the construction industry. The company began operations in 1925 under the name Caterpillar after a merger was formed between Holt Manufacturing and C.L. Best Tractor (USSEC, 2011). The company has set the standard in its industry becoming the largest manufacturer of hauling machines in the world.

Caterpillar operates primarily as a manufacturer of heavy equipment, but, with the realization that they needed to be able to finance purchases of their products and help maintain them, the company has also diverged into financial services and insurance. Caterpillar just recently began a program that they have called Vision 2020 which looks at what the company is right now, who they would like to become and how they can get there. The primary objectives of the plan are geared toward: "Delivering superior results [to shareholders]; Developing the best team of people; and, Becoming the global leader everywhere we do business" (Caterpillar, 2011a). This vision is the driving force behind the company and its operations.

The offices that Caterpillar maintains are of three primary types. First, the company has its major manufacturing centers scattered around the world so that they will be "close to buyers" (Caterpillar, 2011a). The second types of facilities that Caterpillar maintains are distribution centers that are set up in regional areas around the world. The company also has dealers that specifically sell its products. These dealers many times operate directly from either manufacturing or distribution facilities, but Caterpillar has also chosen to work some areas with just a dealership that has no product, but does have the ability to work with buyers in purchasing or leasing Caterpillar equipment. The facilities are maintained in 180 different countries and 500 locations throughout the world (Caterpillar, 2011a).

The company has always been a manufacturer of heavy equipment, but since it has gotten involved in financing and insurance for those products, Caterpillar has entered new markets. The goal is to become a company that allows customers to shop in one place for all of their equipment needs, but there are competitors in all of the markets that Caterpillar occupies. Most major insurance companies have a division that deals with construction equipment, so Caterpillar faces extreme competition in this arena. Its financial business competes with banks and other heavy equipment manufacturers, but Caterpillar is well poised since it is the largest manufacturer and maintains a growing $770 billion business (Caterpillar, 2011a). However, the primary market/line of business remains heavy equipment and, to some extent, smaller tractors. The main industries serviced by Caterpillar equipment is in the "agricultural, demolition & scrap, forestry, general construction, governmental/defense, heavy construction, industrial, landscaping, marine, mining, oil & gas, paving, pipeline, power generation, quarry & aggregates, and waste" (Caterpillar, 2011a).

Stock Price Analysis

Stock price for Caterpillar, Inc. was measured against the S & P. 500 Index from October 2007 until September 2011 (Caterpillar, 2011b). This is a five-year period that marks one of the most volatile in the history of the stock market, thus it is easy to see why people have taken a large amount of money out of the market. However, there are some companies which through sound financial management have either maintained or recovered their value (Caterpillar, 2011b).

Caterpillar is typical of a large manufacturing concern which is heavily invested in such activities as construction. Since late 2007, the construction market in most areas of the world has seen a sharp decline. Governments, companies and individuals have not had to the capital required to either build, expand, or in some cases even maintain construction and this has hurt many companies. Caterpillar makes products which are involved in everything from heavy to small commercial construction projects, so it makes since that they would have seen a sharp decline. Of course, as can be seen from the information preceding, this has not been the case. Caterpillar did see sharp declines during 2009, but the company has maintained a relatively high EBIT which means that the company's financial position has remained very stable. This speaks to the superior management which operates the company. Although Caterpillar is in an industry which has seen significant problems over the past three years, they have maintained a positive dividend and the company has been able to remain strong. Because of the ratios which show superior management, a strong worldwide position which negates trouble in regions or even large portions of the world as long as construction remains strong in some regions (which it has in Asia), and a stock price which has recovered much of its value, it is strongly recommended that investors look at Caterpillar as a strong investment.

All of the previous analysis is backed by an examination of the stock price over the past five years vs. The Standard & Poor Index over the same period of time. Caterpillar has seen highs approaching 120 and lows (in October 2009) of around 25. This would seem volatile without the advantage of a chart which shows the entire period. By looking at the trending map (Appendix). It is easy to see both the dip and the recovery that happened over the past five years. As seen in the ratios, Caterpillar had sharp stock declines from July 2008 until April 2009, and then the company started a gradual stock price increase which got it back up to a high of 116. Since April of this year there has been a slight decline which is consistent with the rest of the stock market. The S & P. shows a steep decline from April of this year until present. Basically Caterpillar's stock price has either matched or outperformed the S & P. For the past five years. It also seems that Caterpillar has realized a steeper recovery than the rest of the stock market.

Since this is a company which should have seen a steep decline and should still be done, this is a good buy. The management of a company is one of the most important factors to consider when an investor seeks a good investment. Looking at the recovery Caterpillar was able to realize and the steady financial performance of the company, even during the depths of the downturn, shows a strong management team which should be able to maintain the stock price and dividend going forward.