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Caterpillar Parsimonious Forecasting and DCF

Caterpillar Parsimonious Forecasting and DCF. Mods 4 and 5 Kevin Lenart. Caterpillar.

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Caterpillar Parsimonious Forecasting and DCF

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  1. Caterpillar Parsimonious Forecasting and DCF Mods 4 and 5 Kevin Lenart

  2. Caterpillar • “With 2012 sales and revenues of $65.875 billion, Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company also is a leading services provider through Caterpillar Financial Services, Caterpillar Remanufacturing Services and Progress Rail Services.” (“Company,” caterpillar.com)

  3. Caterpillar (cont.) • Segments • Construction Industries – infrastructure and building construction • Energy and Power Systems – energy solutions and applications • Resource Industries – mining, lumber • Customer and Dealer Support – support, parts, training • Financial Products – financing • 2012 • Ranked 46 on Fortune 500 list • $2.5 billion spent on R&D • Record sales, revenues, profits

  4. Mod 4 - Forecasting

  5. Terms • RNEA • Return on Net Enterprise Assets • Rate of return on investments in enterprise activities • EPM • Enterprise Profit Margin • Operating profit from each sales dollar, measures profitability • EATO • Enterprise Asset Turnover • Sales from each dollar invested in enterprise assets, measures productivity and efficiency

  6. RNEA

  7. Differences Within Industry • Revenues • All experiencing declines in growth rate except for Joy • EPM from Sales • Komatsu experienced consistent increase, others volatile • EATO • All experiencing decreases in EATO • Each company has specific segments that they specialize in despite diverse offerings • Construction and mining – Caterpillar and Komatsu • Farm – John Deere • Mining – Joy

  8. Basis of Assumptions • Separated Machine & Power Systems and Financial Products for Sales and gave them separate growth rates • More emphasis on 2012 and 2013 results • Reviewed previous results of Caterpillar • Examined trends in companies within the industry • Considered information that influences future company performance • Information in 10-K and Annual Report • Analysts growth estimates as a guide • 5 year average slightly higher than my projection • 2 year growth slightly below my projection

  9. Mod 5 - DCF

  10. DCF Valuation Model • Use forecasted Sales, EPAT and NEA • Calculate year-to-year change in NEA • Subtract change in NEA from EPAT in each year and discount it by the discount factor (1+rEnt)tto calculate PV of FCF • Add these PV of FCFs • Determine PV of Continuing Value • Multiply [FCF of final year x (1+ Growth Rate beyond final year) • Divide this amount by (rEnt – Growth Rate beyond final year) and discount it to PV • Add PV of FCFs and PV of Continuing Value to determine Enterprise Value

  11. ∆ ∆

  12. Explanation • Initially, FCF were all negative • Experienced decline from unexpectedly low sales in mining segment • Customers focused on existing instead of new mining projects • Potential overexpansion that far exceeded demand • Laid off 13,000 workers in past year • Kept NEA constant in this DCF

  13. Sources • "Caterpillar Form 10-K." Caterpillar.com. Caterpillar, 19 Feb. 2013. Web. 14 Jan. 2014. • "Company." Caterpillar.com. Caterpillar, 2013. Web. 14 Jan. 2014. • "Fortune 500 2012: Industry: Construction and Farm Machinery." CNNMoney. Cable News Network, 21 May 2012. Web. 14 Jan. 2014. • Singh, Shruti D. "Caterpillar Cuts Forecast After Sales Fall." Bloomberg.com. Bloomberg, 23 Oct. 2013. Web. 04 Feb. 2014.

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