Corporate Finance Firm Analysis-Caterpillar Inc

8/18/2019 Corporate Finance Firm Analysis-Caterpillar Inc

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Final Group Report

MBA 5350 Corporate Finance

April 9, 2016



Introduction

Caterpillar Inc. traces its origins to the 1925 merger of the Holt Manufacturing Company and the

C. L. Best Tractor Company creating a ne! entity the California"#ased Caterpillar Tractor

Company. In 19$% the company re"organi&ed itself as a 'ela!are corporation under the current

name( Caterpillar Inc. Caterpillar)s head*uarters are located in +eoria Illinois ,nited -tates1.

Primary Business

ith 2/15 sales and re0enues of 3./11 #illion Caterpillar is the !orld4s leading manufacturer

of construction and mining e*uipment diesel and natural gas engines industrial gas tur#ines and

diesel"electric locomoti0es. The company principally operates through its three product segments

" Construction Industries esource Industries and 6nergy 7 Transportation " and also pro0ides

financing and related ser0ices through its 8inancial +roducts segment. Caterpillar also pro0ides

financing for our products through Cat 8inancial a capti0e finance company !ith o0er 5 #illion in assets.

Categories o Business !rgani"ation

1. Machinery, Energy & Transportation: represents the aggregate total of Construction Industries

esource Industries 6nergy 7 Transportation and all other operating segments and related

corporate items and eliminations.➢ Construction Industries

The Construction Industries product portfolio includes the follo!ing machines and

related parts( #ac:hoe loaders compact !heel loaders small trac:"type tractors small

!heel loaders trac:"type loaders medium trac:"type tractors s:id steer loaders mini

e;ca0ators select !or: tools multi"terrain loaders small medium and large trac:

e;ca0ators motor graders medium !heel loaders !heel e;ca0ators Telehandlers

compact trac: loaders pipe layers and mid"tier soil compactors.

➢ Resource Industries

The esource Industries product portfolio includes the follo!ing machines and related

parts( electric rope sho0els large trac:"type tractors !heel tractor scrapers draglineslarge mining truc:s !heel do&ers hydraulic sho0els long!all miners machinery

components trac: and rotary drills large !heel loaders electronics and control systems

1 "Caterpillar Tractor Co. List of eals" . Lehman Brothers Collection. Presi!ent an! ello#s of

$ar%ar! College. '1'. (rchi%e! from the original on '1')11)'*. +etrie%e! '1*)')'-

http(<<!!!.li#rary.h#s.edu<hc<lehman<chrono.html=company>caterpillar?tractor?co

2

https://en.wikipedia.org/wiki/Holt_Manufacturing_Company

https://en.wikipedia.org/wiki/Peoria,_Illinois

http://www.webcitation.org/5u2jB9nzf

http://www.library.hbs.edu/hc/lehman/chrono.html?company=caterpillar_tractor_co



https://en.wikipedia.org/wiki/Peoria,_Illinois

http://www.webcitation.org/5u2jB9nzf



https://en.wikipedia.org/wiki/Holt_Manufacturing_Company



high !all miners off"high!ay truc:s select !or: tools hard roc: 0ehicles articulated

truc:s hard roc: continuous mining systems continuous miners and scoops and haulers.

➢ #nerg$ % &ransportation

The 6nergy 7 Transportation portfolio includes the follo!ing products and related parts(

● reciprocating engine po!ered generator sets@● reciprocating engines supplied to the industrial industry as

!ell as Caterpillar machinery@● integrated systems used in the electric po!er generation

industry@● tur#ines centrifugal gas compressors and related ser0ices@● reciprocating engines and integrated systems and solutions

for the marine and oil and gas industries@● diesel"electric locomoti0es and components and other rail"

related products and ser0ices.. inancial Pro!ucts: primarily includes the company4s 8inancial +roducts -egment. This

category includes Caterpillar 8inancial -er0ices Corporation ACat 8inancial Caterpillar

8inancial Insurance -er0ices AInsurance -er0ices and their respecti0e su#sidiaries2.

Maret

Through a glo#al net!or: of independent dealers and direct sales of certain products Caterpillar

#uilds long"term relationships !ith customers around the !orld.

/toc E0change

In addition to the e! Dor: -toc: 6;change Caterpillar4s common stoc: is also listed on the

stoc: e;changes in 8rance and -!it&erland.

um2er of /tochol!ers

-toc:holders recorded at year"end 2/15 totalled /23. Eppro;imately %F of Caterpillar4s

issued shares are held #y institutions and #an:s 2F #y indi0iduals and 5F #y employeesthrough company stoc: plans.

/toc price mo%ement

2 “/ecurities an! E0change Commission orm 1')3 (nnual report4 iling ate: '1*)')1* 5 Perio! of

+eport: '16)1)71 /EC (ccession o. '''''187')1*)'''1'



3



8rom Mar 2/11 until Mar 2/1% stoc: prices ha0e decreased "29.5$ i.e. "2$.1%F .

Ma9or Competitors

➢ Co'petitors in Construction Industr$( 6;amples of glo#al competitors include Gomatsu Ltd.

ol0o Construction 6*uipment Apart of the ol0o roup CH Industrial .. 'eere 7

Company Hitachi Construction Machinery Co. Ltd. J.C. Bamford 6;ca0ators Ltd. 'oosan

Infracore Co. Ltd. and Hyundai Construction 6*uipment Apart of Hyundai Hea0y Industries. Es

an e;ample of regional and local competitors Caterpillar4s competitors in China also include

uang;i Liuong Machinery Co. Ltd. Long:ing Holdings Ltd. -any Hea0y Industry Co. Ltd.

Kiamen KME Machinery Co. Ltd. KCM roup The -handong Hea0y Industry roup Co.

Ltd. A-hantui Construction Machinery Co. Ltd. -trong Construction Machinery Co. Ltd. and

-handong Lingong Construction Machinery Co. Ltd. Apart of ol0o roup.➢ Co'petitors in Resource Industr$( glo#al surface competitors include Gomatsu Ltd. Joy

lo#al Inc. Hitachi Construction Machinery Co. Ltd. ol0o Construction 6*uipment Etlas

Copco EB and -and0i: Mining. Caterpillar4s glo#al underground competitors include Joy

lo#al Inc. Etlas Copco EB -and0i: Mining and heng&hou Coal Mining Machinery roup

Co. Ltd.➢ Co'petitors in #nerg$ % &ransportation( +rincipal glo#al competitors include Cummins Inc.

olls"oyce +o!er -ystem 6 il 7 as 6 +o!er 7 ater 'eut& E and NrtsilN Corp.

ther competitors such as ME 'iesel 7 Tur#o -6 -iemens 6nergy olls"oyce Marine

Mitsu#ishi Hea0y Industries Ltd. ol0o +enta eichai +o!er Co. Ltd. Girlos:ar il 6ngines

4 http:###.reuters.comfinancestocscompanye#s;sym2ol<C(T.

4



Limited and other emerging mar:et competitors compete in certain mar:ets in !hich Caterpillar

operates. En additional set of competitors including enerac +o!er -ystems Inc. Gohler Co.

Inc. Eggre:o plc and others are pac:agers !ho source engines and<or other components from

domestic and international suppliers and mar:et products regionally and internationally through

a 0ariety of distri#ution channels. In rail"related #usinesses Caterpillar4s glo#al competitors

include 6 Transportation ossloh E -iemens E:teingesellschaft Elstom Transport -E and

oestalpine E.➢ Co'petitors in Finance( Cat 8inancial4s competitors include ells 8argo 6*uipment 8inance

Inc. eneral 6lectric Capital Corporation and 0arious other #an:s and financing companies. In

addition many of Caterpillar4s manufacturing competitors o!n financial su#sidiaries such as

ol0o 8inancial -er0ices Gomatsu 8inancial L.+. and John 'eere Capital Corporation that

utili&e #elo!"mar:et interest rate programs Afunded #y the manufacturer to assist machinesales5.

Prospect

Cost management restructuring actions and operational e;ecution are helping the company

!hile sales and re0enues remain under pressure from !ea: commodity prices and slo!ing

economic gro!th in de0eloping countries%.

Caterpillar4s outloo: for 2/1% Odoes not anticipate impro0ement in !orld economic gro!th or

commodity prices.P

Caterpillar sees 2/1% re0enue falling !ithin a range of /"#illion A,.-. to "#illion. The

midpoint of that range 2"#illion is around .5"#illion #elo! its forecast in cto#er.

It e;pects full"year 2/1% earnings of .// per share e;cluding restructuring costs compared

!ith the a0erage estimate of .$ per share according to Thomson euters I<B<6<-. Including

restructuring costs@ the company said it e;pects 2/1% 6+- of .5/ per share 3.

e#s (nalysis

Cost management restructuring actions and operational e;ecution are helping the company

!hile sales and re0enues remain under pressure from !ea: commodity prices and slo!ing



6 http:2usiness.financialpost.comne#sminingcaterpillar)results)reflect)huge)mining)slo#!o#n

7 “Caterpillar sees first"*uarter re0enue profit #elo! all -treet estimatesPhttp(<<!!!.reuters.com<article<us"caterpillar"outloo:"id,-GC/J1K=type>companye!s

5

http://business.financialpost.com/news/mining/caterpillar-results-reflect-huge-mining-slowdown

http://www.reuters.com/article/us-caterpillar-outlook-idUSKCN0WJ1XV?type=companyNews

http://business.financialpost.com/news/mining/caterpillar-results-reflect-huge-mining-slowdown

http://www.reuters.com/article/us-caterpillar-outlook-idUSKCN0WJ1XV?type=companyNews



economic gro!th in de0eloping countries. Caterpillar sa0ed ,- 2. Billion #y restructuring and

ma:ing its processes leaner and also fall in commodity prices meant a #oon for the Caterpillar as

it sa0ed $F on cost of goods sold. 8rom the analysis of the ne!s and the maQor e0ents it is

e0ident that Caterpillar has #een fighting off the competition *uite successfully and e;panding its

process capa#ilities #y #usinesses supplementing to its core #usiness segments3.

Ma9or E%ents

● In 2/1/ '.. #erhelman is named Chairman of the Board@● In March 2/1/ Co. ac*uired the Inspection +roducts #usiness from 6

Transportation)s Intelligent Control -ystems di0ision@● In the same month Co. ac*uired 1//F of the e*uity in pri0ately held JC-

Company Ltd@● In May 2/1/ Co. ac*uired 1//F of the e*uity in pri0ately held 8CM ail Ltd@● In Eugust 2/1/ Co. ac*uired 1//F of the e*uity in pri0ately held 6lectro"Moti0e

'iesel Inc@● In May 2/11 Co. ac*uired 1//F of the assets and certain lia#ilities of the ,.G.

trac:!or: #usiness from Balfour Beatty ail Limited@● n July $ 2/11 Co. ac*uired Bucyrus International Inc. Bucyrus is a designer

manufacturer and mar:eter of mining e*uipment for the surface and underground mining

industries@● In Eugust 2/11 Co. ac*uired 1//F of the stoc: of +yro#an roup Limited@● n cto#er 1 2/11 Co. ac*uired 1//F of the e*uity in pri0ately held MM

Holding m#H AMM. MM is a glo#al supplier of sustaina#le natural gas andalternati0e"fuel engines. ith the ac*uisition of MM Caterpillar e;pects to e;pand

customer options for sustaina#le po!er generation solutions@● In the second *uarter of 2/12 Co. through its !holly"o!ned su#sidiary

Caterpillar ALu;em#ourg In0estment Co. -.E. completed a tender offer to ac*uire the issued

shares of 6E Mining Machinery Limited A-i!ei including its !holly"o!ned su#sidiary

heng&hou -i!ei Mechanical Manufacturing Co. Ltd@● n March 1 2/12 Co.)s su#sidiary Caterpillar Japan Ltd. ac*uired Caterpillar

Toho:u Ltd.● n Epril 12 2/12 Co. sold a part of its Bucyrus distri#ution and support #usiness

to esTrac +ty Ltd@● In 2/12 The Caterpillar isitors Center opens in +eoria Illinois@● In 2/1 alter Berg EB is ac*uired #y Caterpillar Inc. Berg is a leading

manufacturer of mechanically and electrically dri0en propulsion systems and marine controls

for ships. Head*uartered in Rc:erS Islands -!eden Berg has designed and manufactured

6



hea0y"duty marine thrusters and controlla#le pitch propellers since 1929. Its proprietary

systems are employed in maritime applications throughout the !orld that re*uire precise

manoeu0ring and positioning. ith the ac*uisition Caterpillar !ill transition from selling

only engines and generators to pro0iding complete marine propulsion pac:age systems@● In 2/1 Caterpillar e;pands ur alues in Ection to include -ustaina#ility@● cto#er 2/15 Caterpillar ac*uired 1// percent of the stoc: in pri0ately o!ned

ail +roduct -olutions Inc. A+- from Emsted ail Company Inc. +- is a leading orth

Emerican pro0ider of mission critical trac: fastening products and integrated fastening

systems. The ac*uisition of +- e;pands Caterpillar4s portfolio of trac: related products and

allo!s Caterpillar to pro0ide more comprehensi0e solutions to Caterpillar4s customers@● In 'ecem#er 2/15 Caterpillar ac*uired 1// percent of the stoc: of '-

Manufacturing Inc. A'-. '- located in Bro:en Erro! :lahoma is a pri0ately o!ned

manufacturer of highly engineered tur#o"machinery parts primarily for the tur#ine engine

and aerospace mar:ets@● 2/1% Caterpillar names imco a pri0ately"o!ned +uerto ico"#ased company as

the official Cat dealer for Cu#a$.

Ratio Anal$sis

)i*uidit$ + Current Ratio

201

5 201 2013

201

2 2011

Caterpillar 1.1 1.9 1./ 1. 1.

-eere % Co'pan$ 2./% 2.13 2./5 2.2 2./3

CMI Corporation 2./9 2.25 2.53 2.29 1.9

Caterpillar sho!s sta#le li*uidity !ith a 5"year a0erage of 1.3 for its current ratio. The current

ratio allo!s us to see !ith a *uic: o0er0ie! at the company4s current resources in terms of

li*uidity. Higher li*uidity means that the company has more a0aila#le resources to deal !ithshortcomings or ne! proQects in the short term. The 0alue can #e found #y di0iding the

company4s current assets Asuch as cash o0er its current lia#ilities. Elthough its current ratio is

8 “/ecurities an! E0change Commission orm 1')3 (nnual reports year '11, '1, '17, '1 &

'164 /EC (ccession os. '''11'*6=)11)''8=78, '''''187')1*)'''1', '''''187')16)''''*1,

'''''187')1)''''68, '''''187')17)''''-6

7



sta#le Caterpillar sho!s a lo!er ratio than that of its competitors. 'eere sho!s a 5"year a0erage

of 2.12 and CMI 2.2. Therefore Caterpillar is #y comparison less prepared to face

shortcomings !hen loo:ing only at its li*uidity.

#icienc$ + Assets &urno.er Ratio

201

5 201 2013

201

2 2011

Caterpillar /.5$ /.%5 /.% /.33 /.$

-eere % Co'pan$ /.$ /.%/ /.%5 /.%9 /.3/

CMI Corporation 1.2 1.2% 1.23 1. 1.%

The assets turno0er ratio demonstrates ho! *uic:ly a company manages its assets. 6fficientmanagement of assets helps pre0ent a #uild up of unsold in0entory that !ould decrease in 0alue

!ith time and increase storage related e;penses. The ratio is calculated #y di0iding the

company4s net sales o0er a0erage total assets. Caterpillar4s asset turno0er ratio is *uite lo! #eing

under 1. Its 5"year a0erage for this ratio is /.%9 !hich is lo!er than CMI #ut higher than 'eere.

It is important to note here that all three companies ha0e e;perienced a decrease in their turno0er

ratio o0er the last fi0e years. This trend can #e o#ser0ed #y a slo!ing mar:et for this particular

industry ma:ing it increasingly difficult for these companies to sell their in0entory as efficiently

as pre0ious years.

/tailit$ + -et to #*uit$ Ratio

2015 201

201

3 2012 2011

Caterpillar 2.53 2.5 1.$1 2.29 2.%9

-eere % Co'pan$ 5.3 ./$ .% .3 .91

CMI Corporation /.22 /.22 /.2 /.12 /.1

'e#t to e*uity ratio pro0ides an indicator of the company4s sta#ility. If the company too: on too

many de#ts it !ill #e #urdened #y regular principal and interest payments and may ha0e an

impact on the company4s sur0i0al in the long"term. The ratio is calculated #y di0iding the

8



company4s total lia#ilities o0er its total e*uity. 8rom an accounting point of 0ie! a lo!er ratio is

traditionally 0ie!ed as #eing an indication of sta#ility as it means the company is relati0ely

de#t"free. Caterpillar4s 5"year a0erage is 2. !hich is relati0ely high. This means that

Caterpillar has Qust a little o0er t!ice as many de#ts as e*uity. The rate is lo!er than that of its

competitor 'eere #ut higher than CMI !hich has an e;traordinarily lo! ratio.

Grot + Annual Re.enue Grot

2/15 2/1 2/1 2/12 2/11

Caterpillar

"

1.$1F "/.$5F

"

15.51F 9.5F 1.21F

-eere % Co'pan$"

19.93F ".53F .5F12.95

F 2.1/F

CMI Corporation /.5$F 11.1/F "/.19F ".9%F %.%F

In terms of gro!th Caterpillar sho!ed a 5"year a0erage gro!th of /./F. It is important to

note ho!e0er that there is a do!n!ard trend as its annual re0enue gro!th dropped from

1.21F in 2/11 to a negati0e gro!th of "1.$1F in 2/15. This can #e e;plained #y the same

phenomenon affecting the turno0er ratio( the mar:et for this industry has ta:en a hit in recent

years. 8rom this data !e can see ho!e0er that Caterpillar !as not the hardest hit( 'eere ended

2/15 !ith a !orst annual re0enue gro!th !hich CMI4s data sho!ed more fluctuation. hen

comparing this ratio to a de#t ratio !e can e;plain that in times of recession re0enues !ill drop

#ut companies #urdened #y hea0y de#ts still ha0e an o#ligation to ma:e their regular payments.

Therefore these companies ha0ing a higher de#t ratio are more li:ely to ha0e difficulty

maintaining gro!th.

9



Go.ernance Anal$sis

Boar! /tructure an! 2acgroun! information

Caterpillar4s #oard structure includes four features( 1 Com#ined Chief 6;ecuti0e fficer and

Chairman of the #oard@ 2 a +residing 'irector !ho has #road authority o0er go0ernance of the

Board@ Independent 'irectors@ and Committees composed entirely of independent directors 9

Caterpillar4s uidelines on o0ernance issues set the range for #oard mem#ers to #e #et!een 11

and 1. Currently the num#er of directors is 12 " !ithin this range. 8urther in line !ith the

re*uirements of the uidelines1/ and to ensure independence of the #oard only t!o directors can

#e non"independent at any point in time. Eccording to the uidelines Oa director is independent

as long as he or she has no direct or indirect material relationship !ith the Company either

directly or as a partner shareholder or officer of an organi&ation that has a relationship !ith the

CompanyP.11 En annual re0ie! process #ased on e! Dor: -toc: 6;change -tandards of

Independence is in place to assess the independence of directors. Hence out of the 12 directors

currently ser0ing on the Board 11 are independent. nly the Chairman of the Board !ho is also

C6 of the Company is non"independent. Independent 'irectors of the Board ha0e #usiness

education go0ernment and pu#lic policy #ac:ground. OThey currently ser0e or ha0e ser0ed as

chief e;ecuti0es and mem#ers of senior management of large pu#lic and pri0ate for profit

companies@ as leaders of numerous nonprofit organi&ations@ as ,.-. federal and state go0ernment

officials@ and as mem#ers of academiaP.12 'irectors are elected at each annual meeting to ser0e

for a one"year term. 'etailed #ac:ground information a#out 'irectors is gi0en in the Eppendi;.

+residing 'irector is elected from independent mem#ers of the Board. Currently Chairman of

the +u#lic +olicy and o0ernance Committee ser0es as the +residing 'irector. This position is

e;tremely important in go0ernance structure as the +residing 'irector has #road authority o0er

go0ernance of the Board. His responsi#ilities include( 1 presiding o0er Board meeting !hen

9 OCaterpillar 2/15 Ennual Meeting +ro;y -tatementP

http( //www.caterpillar.com/en/investors/fnancialIno/proxy-statement/annual-meeting-proxy-

statement.html

10 “Caterpillar uidelines on Corporate o0ernance IssuesP Aas amended #y the Board on 8e#ruary 1/ 2/1%

http(<<s3d2.scene3.com<is<content<Caterpillar<C1/$31%5

11 I#id

12 “2015 aterpillar !nnual "eeting #roxy $tatement%

10

http://www.caterpillar.com/en/investors/financialInfo/proxy-statement/annual-meeting-proxy-statement.html




http://s7d2.scene7.com/is/content/Caterpillar/C10873165




http://s7d2.scene7.com/is/content/Caterpillar/C10873165



Chairman is not a0aila#le@ 2 ser0ing as a liaison #et!een the Chairman and independent

'irectors@ appro0ing meeting agendas for the Board@ authority to call meeting of

independent directors@ 5 direct communication !ith maQor shareholders@ % appro0ing meeting

schedules.1

Enother important feature of the Board is that all committees namely Eudit Compensation and

Human esources and +u#lic +olicy and o0ernance are composed entirely of independent

directors. Eccording to In0estopedia article the Compensation and Eudit Committees are t!o

critical #oard committees that must #e made up of independent mem#ers.1 Es such Caterpillar

!ent e0en further !ith the third committee also composed of independent directors. Et the same

time no 'irector ser0es in more than one committee !hich facilitates a0oidance of any conflicts

of interest. This composition ensures Committees4 independence in important tas:s they perform.

This importance #ecomes crystal clear loo:ing at the nature of these tas:s. 8or e;ample the most

important tas: performed #y the Compensation and Human esources Committee is

determination of C64s and other e;ecuti0es4 compensations@ Eudit Committee o0ersees

financial reporting !hile +u#lic +olicy and o0ernance Committee selects Board candidates

determines Board4s si&e and composition as !ell as underta:es officer succession planning.

Eccording to go0ernance e;perts Ostoc: compensation or o!nership can help align directors4

interests !ith those of shareholdersP.15

Caterpillar is doing Qust that as almost 5/F of 'irectors4compensation consists of stoc:s. OTarget o!nership guidelines re*uire directors to o!n

Caterpillar common stoc: in the amount of t!o and one half times their annual compensationP. 1%

Moreo0er 'irector 6d!ard ust is the current Chairman of the -tate 8arm Mutual Eutomo#ile

Insurance Company !hich holds .5F of Caterpillar shares. Enother director namely Juan

allardo is also one of the maQor indi0idual shareholders of Caterpillar. Thus the compensation

structure of the Caterpillar4s Board of 'irectors is in line !ith the e;isting good practices of

corporate go0ernance.

13 O2/15 Caterpillar Ennual Meeting +ro;y -tatementP

14 O60aluating The Board of 'irectorsP >n%estope!ia 'ecem#er 1/ 2/1

http(<<!!!.in0estopedia.com<articles<analyst</<1119/.asp

15 Judith Burns O60erything Dou anted to Gno! a#out Corporate o0ernanceP The ?all /treet @ournal cto#er

23 2// http(<<!!!.!sQ.com<articles<-B1/%%3%2$/2$3%1//

16O2/15 Caterpillar Ennual Meeting +ro;y -tatementP

11

http://www.investopedia.com/articles/analyst/03/111903.asp

http://www.wsj.com/articles/SB106676280248746100

http://www.investopedia.com/articles/analyst/03/111903.asp

http://www.wsj.com/articles/SB106676280248746100



It should #e emphasi&ed that since 2/// some shareholders of Caterpillar ha0e #een raising

concerns regarding C64s occupation of the Board4s Chair. enerally it is a 0ery contentious

issue in the !orld of corporate go0ernance. Many argue that the #oard of directors should #e

totally independent from the management of the company so that the #oard could effecti0ely

e;ercise super0ision o0er actions of the e;ecuti0e management. End !hen the C6 holds

simultaneously the position of the Chair it depri0es the Board of its independence and as such

ena#les the C6 to manipulate !ith the Board. That said many companies do not agree !ith this

argument and put counterargument that ha0ing C6 and chairman of the #oard as the same

person facilitates communication #et!een the company and the #oard and ensures single 0oice

in dealings !ith different sta:eholders. O-:eptics note that #oth 6nron and orldCom had

none;ecuti0e chairmen and they !orry that splitting the t!o roles could create conflict in the

#oardroomP.13 -o far a group of concerned shareholders has failed to gain necessary support for

their proposal of remo0ing the C6 from the Board at the Ennual Meetings of Caterpillar4s

-toc:holders.

?ho are the ma9or sharehol!ers;

Es mentioned a#o0e appro;imately % percent of Caterpillar4s shares are held #y institutions

and #an:s 2 percent #y indi0iduals and 5 percent #y employees through company stoc: plans.

The maQor shareholders of Caterpillar include the follo!ing indi0iduals1$

(

● +eter Mago!an Ao!ns /./5F of shares " former managing general partner of the -an 8rancisco

iants MaQor League Base#all franchise@● Juan Entonio allardo Ao!ns /./5F of shares " C6 7 'irector at rupo E&ucarero Me;ico

-E de C Acane sugar processing refining and mar:eting@● Juan allardo Thurlo! Ao!ns /./5F of shares director at Caterpillar Board of 'irectors

Chairman of the Board and C6 of rgani&aciUn Culti#a -.E.B. de C.. the holding company

for rupo 6++ -.E.+.I. de C.. A+epsicola #ottling group in Me;ico and rupo E&ucarero

Me;ico -.E. de C.. Asugar mills@● 'ouglas #erhelman Ao!ns /./F of shares " current C6 and Chair of the Board of 'irectors

of Caterpillar@

17 Judith Burns op. cit.

18 Factiva Company Report for Caterpillar 2016

12

https://en.wikipedia.org/wiki/Major_League_Baseball






● unning -te0en and -tuart Le0enic: A/./F and /./2F of shares respecti0ely #oth former

Caterpillar e;ecuti0es.

Eccording to E-'EV.com there are 115 institutions that hold shares of Caterpillar.19 Top

Institutional Holders of Caterpillar shares include2/(

● --gE 8unds Management " 9.$9F of shares@● The anguard roup Inc. " %.2F@● Capital esearch 7 Management Co. Aorld In0estors " .$F@● Blac:oc: 8und Ed0isors " .%9F@● -tate 8arm In0estment Management Corp. " .53F@● Harris Essociates L.+. " 2.9F@● Capital esearch 7 Management Co. Alo#al In0estors " 2.%2F@● ellington Management Company LL+ " 2.F@● Bill 7 Melinda ates 8oundation Trust AIn0estment Management" 1.9F@● 8ran:lin Mutual Ed0isers LLC " 1.$F@● orthern Trust In0estments Inc. " 1.1$F@● Mellon Capital Management Corp. " 1.12F.

Top Mutual 8und Holders of shares include21(

● anguard Total -toc: Mar:et Inde; 8und " 1.$$F of shares@● Emerican 8unds Income 8und of Emerica " 1.5%F● anguard 5// Inde; 8und " 1.2F● anguard Institutional Inde; 8und " 1./9F

● anguard ellington 8und " 1./5F● -+' -7+ 5// 6T8 " 1./2F● -+' 'o! Jones Industrial E0erage 6T8 " /.$2F@● a:mar: 8und " /.3%F@● Emerican 8unds ashington Mutual In0estors " /.3F@● Emerican 8unds In0estment Company of Emerica " /.3F@● Emerican 8unds 8undamental In0estors " /.3F@● anguard +IM6CE+ 8und " /.31F.

In general !e can say that Caterpillar4s shares are !idely dispersed.

Compensation of top e0ecuti%es

19 Caterpillar Inc. !nership -ummary http(<<!!!.nasda*.com<sym#ol<cat<o!nership"summary

20 8acti0a Company eport for Caterpillar 2/1%

21 Ii!"

13

http://www.nasdaq.com/symbol/cat/ownership-summary





The compensation structure of top e;ecuti0es at Caterpillar contains components( 1 #ase

salary 2 stoc: option 6;ecuti0e -hort Term Incenti0e +lan A6-TI+ and -trategic

+erformance +lan A-++.22 This compensation structure is hea0ily lin:ed to the company4s

performances. Eccordingly the #ase salary is the smallest component of the compensation

structure !hile e*uity represents the #iggest percentage. 6*uity has the #iggest share as it lin:s

e;ecuti0es4 compensation to stoc:holder e;pectations. These are non"*ualified stoc: options that

e;pire 1/ years after the grant and #ecome e;ercisa#le three years from the grant date. Incenti0e

compensations are tied to performance indicators as !ell. They are di0ided into long"term A-++

and short"term A6-TI+ incenti0es. hile 6-TI+ is #ased on corporate and #usiness unit

performance -++ is #ased on company success in the long"run. In other !ords 6-TI+ is #ased

on achie0ing performance goals especially financial ones on a #usiness and corporate unit le0el.

It is lin:ed to earnings per share indicator. -++ in its turn is tied to company performance o0er a

"year performance cycle and it is mainly a#out stoc:holder return measured against other -7+

5// companies.2

In line !ith a#o0ementioned compensation structure 1.9 million in compensation of

Caterpillar4s C6 in 2/1 included 1.% million of #ase salary million of 6-TI+ /.9 million of

-++ and $. million of stoc: option.2 -o the C64s compensation structure contained 5%F

stoc: options 23F of 6-TI+ 11F of #ase salary and %F of -++. 8or the C8 it !as 9F of

stoc: /F of 6-TI+ 1%F of #ase salary and 5F of -++.25 8urthermore in order to ensure the

competiti0eness of its compensation structure Caterpillar routinely assesses its compensations

against those of other companies chosen #y Caterpillar. Ell these companies are compara#le to

Caterpillar in terms of re0enue and glo#al presence.

It is interesting to point out that in 2/15 the Ennual Meeting of -hareholders e;ecuti0e

compensation plan !as only supported #y %%F percent of stoc:holders !hile this figure !as

9%F last year .2% This !as an indication that shareholders !ere dissatisfied !ith the e;isting gap

#et!een e;ecuti0e compensation and the stoc: price. -ome groups critici&ed the company4s

policy of lin:ing e;ecuti0e compensation to earnings per share !hich could #e manipulated #y



24 Ii!

25 Ii!

26 -hruti 'ate -ingh OE Third of Caterpillar In0estors eQect 6;ecuti0e +ay +lanP Bloom2erg June 1/ 2/15

http(<<!!!.#loom#erg.com<ne!s<articles<2/15"/%"1/<a"third"of"caterpillar"holders"0ote"against"e;ecuti0e"pay"plan

14

http://www.bloomberg.com/news/articles/2015-06-10/a-third-of-caterpillar-holders-vote-against-executive-pay-plan

http://www.bloomberg.com/news/articles/2015-06-10/a-third-of-caterpillar-holders-vote-against-executive-pay-plan



share repurchases.23 It should #e mentioned that C64s in the list of -7+ 5// companies earned

12.3 million on a0erage in 2/1.2$ Es such Caterpillar C64s compensation !ith 1.9 million

!as a#o0e a0erage in 2/1 and this represented 1F increase o0er 2/1.29 Ho!e0er unli:e

C64s compensation Caterpillar4s sales ha0e dropped a#out 1/ #illion in 2/1"2/1 and the

stoc: has tum#led 19F o0er 2/1./ That is !hy e;ecuti0e compensation !as #ac:ed only #y

%%F of shareholders in 2/15 Ennual Meeting. End it should #e mentioned that Oless than 3/F

support is considered a strong sign of in0estor dissatisfactionP.1

27 -hruti 'ate -ingh op. cit.

28 Matt Grant& O-urpriseW omen Trump Men on C6 +ayP A/( To!ay Epril / 2/15

http(<<americasmar:ets.usatoday.com<2/15</</<surprise"!omen"trump"men"on"ceo"pay<

29 James .Hagerty and Joann -. Lu#lin -hareholders e#u:e Caterpillar 0er 6;ecuti0e +ay The all -treet

Journal June 1/ 2/15 http(<<!!!.!sQ.com<articles<caterpillar"e;ecuti0e"pay"plans"to"#e"put"to"shareholder"test"19213

30 -hruti 'ate -ingh op. cit.

31 James .Hagerty and Joann -. Lu#lin op.cit.

15

http://americasmarkets.usatoday.com/2015/04/30/surprise-women-trump-men-on-ceo-pay/

http://www.wsj.com/articles/caterpillar-executive-pay-plans-to-be-put-to-shareholder-test-1433942147



http://americasmarkets.usatoday.com/2015/04/30/surprise-women-trump-men-on-ceo-pay/





-i.idend olic$

Caterpillar Inc4 2015 201 2013 2012 2011

'i0idends per -hare ./1 2.3/ 2.2 2./2 1.$2

Total Cash Common

'i0idends 13$$.$ 1%%%. 19%.$% 119.// 113%.//

Xdollars in million e;cept per share data

Caterpillar Inc. follo!s a sta#le di0idend policy. The company4s declared di0idend increased

e0ery year in a sta#le manner. Thus di0idend declared !as not dependent on the residual internal

funds after proQects the company had to spare from year to year. If that !ere the case !e !ould

see unsta#le fluctuation in the di0idends declared especially !hen loo:ing at a 5"year hori&on.

i0en ho! sta#le the data is from one year to the ne;t in its steady increase !e can also see that

the company is not follo!ing a hy#rid policy model. Elthough the hy#rid model !ould sho! less

fluctuation than the residual model it !ould #e nonetheless dependent at least in part on the

company4s yearly profit and therefore !ould also see some degree of fluctuation as the company

did not generate sta#le profit from 2/11 to 2/15. In fact profits dropped from 5%$1M in 2/12

to 3$9M in 2/1.

The #enefits of using the sta#le policy model resides in the signals it sends to the mar:et. By

pro0iding steady di0idends the company pre0ents sending negati0e signals to the mar:et. 8or

e;ample relying on yearly profits to esta#lish di0idends translates in a negati0e signal to

in0estors e0ery time the company chooses not to pay di0idend. In0estors may *uic:ly ha0e the

impression that the company is in financial trou#le therefore it is #est for them to sell their stoc:

#efore the stoc: price drops. By doing so the 0alue of the stoc:s and the firm are Qeopardi&ede0ery time there is a negati0e change in the di0idend payout.

n the other hand :eeping a sta#le di0idend policy reassures in0estors. 8ollo!ing the re0erse

logic of the pre0ious paragraph the a0erage in0estors !ould not #e discouraged from in0esting

since the company at least at first sight !hen loo:ing at di0idends only appears to #e in good

16



shape #y not sending negati0e signals. f course more details such as profits can #e found on

financial statements. Ho!e0er e0en for in0estors loo:ing further into company data they !ould

at least #e reassured that if their goal is to recei0e di0idend they can e;pect that di0idend !ill #e

steady.

Ho!e0er maQor stoc:holders and #oard mem#ers may feel ner0ous a#out this type of policy. The

industry has e;perienced a hit in recent years and declaring di0idends !hen profits are

decreasing means the company has less cash flo! a0aila#le for ne! proQects or une;pected

e;penses. Conse*uently from a maQor stoc:holders point of 0ie! this type of policy may

endanger the company4s a#ility to respond to or sur0i0e negati0e trends in the mar:et.

Capital /tructure

Es !e learned in class capital structure is the mi; of de#t and e*uity that is used in order to

finance the organi&ation4s assets. The optimal mi; of de#t and e*uity should ma;imi&e the

stoc:4s intrinsic 0alue and minimi&e the ECC.2 rgani&ations typically ha0e a target capital

structure and it can #e modified depending the mar:et conditions. In the case of Caterpillar prior

to the economic recession in 2//$ they had a capital structure of $9F de#t and 11F e*uity.

This percentage of de#t !as *uite high !hich can create t!o issues. The first is that a high

percentage of de#t can increase the organi&ation4s ris: !hich ma:es de#t and e*uity more costly.

The second issue is that if an organi&ation enters into financial hardship they may not ha0e

sufficient operating income to co0er the interest !hich may result in #an:ruptcy. hen the

glo#al economic recession hit in 2//$ Caterpillar felt the impacts of reduced sales in early 2//9.

Es a result the management team made a conscious decision to lo!er its !or:ing capital reduce

o0erhead costs and pay do!n its de#t. By 2/12 the organi&ation reduced its de#t percentage to

35F. The company maintained their E #ond rating.

The current capital structure of Caterpillar is 33.%$F de#t and 22.2F e*uity !hich represents a

de#t to e*uity ratio of appro;imately $(2. e !ould not consider this capital structure as ris:y

gi0en that Caterpillar has sufficient re0enue to co0er its interest e;penses. More specifically the

annual interest co0erage ratio is $ !hich is 0ery strong and indicates that the company has

sufficient re0enue to co0er its interest on de#t at least on a short term perspecti0e. hen

32 Brigham 6. Houston J. 8undamentals of 8inancial Management. pg. 5

33 Brigham 6. Houston J. 8undamentals of 8inancial Management. pg. 52

17



e;amining the interest co0erage ratio on a *uarterly #asis o0er the last year ho!e0er there has

#een a steady decline in this ratio.

Vuarterly Interest

Co0erage atio

-ec 31, 2015 /ept 30, 2015 une 30, 2015 Marc 31, 2015

"/./3 5./$ $.9 1./5

Ennual Interest

Co0erage atio

201 2013 2012 2011

11.9 12.22 19./ 19.$1

By comparing these ratios to Caterpillar4s main competitors !e also see that this organi&ation

has a sta#le capital structure. The ta#le #elo! outlines the capital structure and interest co0erage

ratio of Caterpillar 'eere 7 Company and CH Industrial(

Co'pan$ Capital /tructure Interest Co.erage

Ratio Annual7-et #*uit$

Caterpillar 33.%$F 22.2F $'eere 7 Company $%.%2F 1.1$F 5.1

CH Industrial $3.//F 1.//F 1.5

The capital structure of all three companies are *uite similar !ith Caterpillar ha0ing slightly less

de#t and more e*uity. This is most li:ely as a result of their decision ta:en in 2//9 to reduce

their de#t #ased on the economic recession. 'eere 7 Company also has a 0ery strong interest

co0erage ratio at 5.1 !hich indicates they ha0e sufficient re0enue to co0er their interest. In the

case of CH Industrial their interest co0erage ratio is 0ery lo! at 1.5 !hich may limit the

possi#ility of ta:ing on additional de#t as lenders may percei0e the company as #eing too ris:y

and the possi#ility of default too high. 0erall Caterpillar4s capital structure appears strong and

more importantly they recogni&e the need to adQust this structure #ased on mar:et conditions.

18



Cost o Capital

Calculating the cost of capital for Caterpillar pro0ides an indication of ho! the mar:et 0ie!s the

ris: of Caterpillar4s assets. Gno!ing their cost of capital can also help us determine our re*uired

return for capital #udgeting proQects.

Cost of !e2t

e start #y calculating the cost of de#t for Caterpillar #y adding up the yield to maturity for

Caterpillar plus the flotation cost. Based on data collected from Bloom#erg Caterpillar does not

list a flotation cost therefore !e used a 0alue of / for it. The data from Bloom#erg indicated that

Caterpillars com#ined DTM !as 1.33F. ,sing the formula Cost of de#t > Dield to maturity Y

flotation cost !e arri0e to a #efore ta; cost of de#t of 1.33F and an after ta; cost of de#t of

1.1F at a 2%F ta; rate Afrom Bloom#erg. Bloom#erg lists the #efore"ta; cost of de#t as 1.3%F.This cost of de#t is the re*uired return on Caterpillar4s long term de#t.

Cost of euity

e;t !e calculated the cost of e*uity for Caterpillar using t!o methods. The first method is the

'i0idend gro!th method. ,sing this method !e calculate the cost of e*uity #y di0iding the 0alue

of di0idend for 2/15 in 2/1 #y the share price and multiplying the result #y the gro!th. e

used the formula Cost of common e*uity > AAdi0ided in year 1<price Y gro!th. The gro!th rate

!as calculated #y using 8 > +A1 Y gZn !hich resulted in a result of %.F. Caterpillar had a

di0idend of 2.9 in 2/15 !hich !or:s to .1 of 0alue in 2/1. The share price as of

'ecem#er 1 2/15 !as %3.%9. Es mentioned earlier flotation costs !ere assumed to #e /.

+lugging these 0alues into the formula results in a cost of e*uity of 1/.9F.

,sing the second method !hich is the Capital Esset +ricing Model ACE+M !hich is calculated

using this formula( Cost of common e*uity > is:"free rate Y BetaXAMar:et ris: premium > f

Y BetaXAm " f. e ris: free rate !as 1.33F #ased on the ,- department of Treasury 1/ year

#ond rate !ith a mar:et ris: premium of 5.5F. e also found Beta to #e 1.%/. +lugging these0alues in the formula results in a cost of e*uity of 1/.53F.

34 #ttp$%&&'''"trea$(ry")ov&re$o(rce*center&!ata*c#art*center&intere$t*rate$&+a)e$&,e-t.ie'"a$p-/

!atayiel!

19

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield






,sing #oth methods resulted in similar results for cost of e*uity and #oth results !ere 0ery close

to the Cost of e*uity listed in Bloom#erg as 1/.92F. Cost of e*uity indicates the return re*uired

#y e*uity in0estors gi0en the ris: of the cash flo!s from Caterpillar.

?(CC an! Beta

e then proceeded to calculate ECC #y using this formula( ECC > A!eight of common

e*uityXcost of common e*uity Y A!eight of preferred e*uityXcost of preferred e*uity Y A!eight

of long"term de#tXcost of long"term de#t. e calculated the ratios<!eight of common e*uity

preferred e*uity and long term de#t as 52.5F /F and 3.5F respecti0ely. ote that Caterpillar

does not issue any prefered shares #ased on Bloom#erg data. ECC !as also calculated #ased

on the cost of common e*uity calculated #y #oth the 'i0idend gro!th model A1/.9F and the

CE+M method A1/.53F. +lugging these 0alues into the formula results in a ECC 0alue of %.$F !hen using cost of e*uity of 1/.9F and %.15 !hen using 1/.53F. Egain #oth ECC

0alues are 0ery similar. ECC listed in Bloom#erg !as also 0ery similar at a 0alue of %.F.

ECC indicates the a0erage cost of capital for Caterpillar. This a0erage is the re*uired return on

Caterpillar4s assets #ased on the mar:et perception of the ris: of those assets.

The ta#le #elo! indicates a summary of the calculated Cost of 6*uity Cost of 'e#t ECC

using #oth methods and Beta for Caterpillar. ote that Beta !as ac*uired from Bloom#erg data

and !as not calculated specifically.

esults alue

Cost of 6*uity ,sing 'i0idend ro!th Model 1/.9F

Cost of 6*uity ,sing CE+M 1/.53F

Cost of 'e#t 1.33F

ECC using di0idend gro!th model %.$F

ECC using CE+M %.15F

Beta 1.%

8aluation and /toc rice -eter'ination

20



Based on Caterpillar4s pre0ious income and #alance statements ta:en from Bloom#erg !e !ere

a#le to produce the follo!ing assumptions.

ECC %.$F

Long term ro!th ate 5F-ales gro!th 2/1%"2/13 "5F-ales ro!th 2/1$"2/2/ 1F-ales ro!th after 2/2/ FCurrent assets<-ales 5$Fther assets<-ales 52FCurrent lia#ilities<-ales 5/F et fi;ed assets<-ales 29FCosts of goods sold<-ales %$F-E<-ales 1F

onoperation Income<-ales 1F'epreciation rate 1/FInterest rate on de#t 5FInterest earned on cash #alances 2FTa; rate 23F'i0idend payout ratio 2F

Loans are repaid at1///./ A,-

millions

It is important to note that !e used rates o0er fi0e years A2/11"2/15 to arri0e at our

assumptions. The only e;ception is sales gro!th. Here !e did not include gro!th rate of 2/11

o0er 2/1/ #ecause this gro!th rate represented an outlier. It !as so high that it could ha0e easily

spoiled all of our calculations. 8or e;ample !ithout inclusion of 2/11 gro!th rate !e arri0ed at

an assumption of "5F !hile !ith inclusion of this gro!th rate it !as Y5F. Therefore !e ha0e

decided against inclusion of 2/11 sales gro!th rate. Es such !e arri0ed at negati0e 5F as sales

gro!th rate. Then !e consulted different !e#sites and e;perts especially Bloom#erg regarding

the credi#ility of our assumption. 8ortunately our assumption !as in line !ith !hat has #een

predicted #y Caterpillar itself 5

and the industry e;perts. ur further research has re0ealed that itis not reasona#le to e;pect negati0e sales gro!th rate after the year of 2/13. -o #ased on this

research !e ha0e di0ided our assumptions on sales gro!th to three parts( "5F for 2/1%"2/13@ 1F

for the period of 2/1$"2/2/@ and F after 2/2/. These assumptions clearly represent the state in

35 Meredith 'a0is OCaterpillar 8orecasts Lo!er +rofit -ales in 2/1%P +euters cto#er 22 2/15

http(<<!!!.reuters.com<article<us"caterpillar"results"id,-GC/-1'G2/151/2

21

http://www.reuters.com/article/us-caterpillar-results-idUSKCN0SG1DK20151023

http://www.reuters.com/article/us-caterpillar-results-idUSKCN0SG1DK20151023



the mining industry !ith declining commodity prices and the slo!do!n of the Chinese economy

as one of the #iggest mar:ets for Caterpillar as !ell as positi0e e;pectations after 2/1$.

To arri0e at all other assumptions !e used yearly rates o0er 5 years and then too: an a0erage of

those num#ers. It is important to note that those yearly rates !ere not too far from the

assumptions !hich !e arri0ed at. In other !ords there !ere no outliers !hich could ha0e

spoiled our calculations. This attests to the credi#ility of our assumptions.

Last #ut not least long term gro!th rate is #ased on research conducted #y us !hile loans

repayment indicator is #ased on 1F of cash as per +rofessor 'utta4s guidance.

The assumptions !ere used to deri0e the free cash flo! forecasts for the ne;t ten year A2/1%"2/25. Es sho!n in the ta#le #elo! the proQected cash flo!s are predicted to decline steadily

o0er the ne;t decade.

Dear 2/1% 2/13 2/1$ 2/19 2/2/ 2/21 2/22 2/2 2/2 2/25+roQected 8ree

cash flo!1$.3 %.% 2%.3 221$.3 193./ 135.5 12.9 939.5 %35. 2$.

e;t !e calculated the present 0alue of the terminal 0alue. The terminal 0alue calculation is

Oused to determine the 0alue of the firm for all years #eyond !hich one can relia#ly proQect cash

flo! using the discounted cash flo!P. %

/tage 1 + Calculating te &er'inal 8alue

:eigted a.erage cost o capital, :ACC %.$F

)ong+ter' grot rate o FCFs, g 5.//F

;ear 10 FCF or $ear 20257 2$.

&er'inal .alue 293%.5

resent .alue o te ter'inal 8alue 15%.5

The terminal 0alue !as then used to help determine total free cash flo! for caterpillar in 2/25.

-tage 2 " Calculating Total 8ree Cash 8lo! A8C8

36 i:in0est. A2/12. Terminal alue. etrie0ed from http(<<!!!.!i:in0est.com<!i:i<Terminal?alue

22



Dear 2/1% 2/13 2/1$ 2/19 2/2/ 2/21 2/22 2/2 2/2 2/25

8C8 A8ree

cash flo!1$.3 %.% 2%.3 221$.3 193./ 135.5 12.9 939.5 %35. 2$.

Terminal

0alue 15%.5

Total 8C8 1$.3 %.% 2%.3 221$.3 193./ 135.5 12.9 939.5 %35. 13$.3

The final step of forecasting in0ol0ed finding the enterprise 0alue firm 0alue and per share 0alue

of Caterpillar Inc

/tage 3 + Calculating enterprise .alue, ir' .alue and per+sare .alue

#nterprise 8alue 22$15.

Add in initial $ear 07 cas and 't4 securities 239/%./

Fir' .alue 5/321.

/utract out .alue o ir'<s det toda$ "123$./

#*uit$ .alue 393.

er+sare e*uit$ .aluation ased on 5=2 'illion sares outstanding7 %5.2

Caterpillar4s -toc: price as reported in the stoc: e;change on March 2% 2/1% !as 35.25

A,-'. ur model re0ealed a share price of %5.2/ ,-. E comparison of #oth prices Amar:et

share price and our price !ould suggest that CET is currently o0er0alued. This result could also

indicate that our assumptions are slightly off.

Conclusion

● Caterpillar>s Ratios( Caterpillar4s li*uidity ratios are sta#le #ut !orse than its competitors

'eere and CMI !ith a 5"year a0erage of 1.3 for the current ratio. Its asset turno0er ratio

sho!ing the company4s efficiency !ith an a0erage of /.%9 is at the lo! end compared !ith its

competitors. Its sta#ility ratios namely de#t to e*uity is a0erage !hen loo:ing at its competitors

#ut relati0ely high !ith an a0erage of 2.. The company not only operated a negati0e gro!th of

"1.$1F in 2/15 #ut also has seen a gro!th decrease totalling 55F in the last fi0e years.● Corporate Go.ernance( Caterpillar4s leadership structure reflects e;isting #est practices in

corporate go0ernance. The #oard is mainly composed of independent directors !ho ensure true

o0ersight o0er management4s acti0ities. The only non"independent mem#er of the Board is

current C6 of Caterpillar and his presence in the Board is #alanced #y the +residing 'irector

23



!ith #road authority o0er Board4s go0ernance. In line !ith the e;isting standards Board

mem#ers are shareholders of the company as part of their compensation is paid in stoc:s.

Moreo0er Eudit Compensation and o0ernance committees are all composed entirely of

independent directors. -hareholders of the company are mainly institutions holding almost %F

of Caterpillar4s shares !hile maQor indi0idual shareholders also include former and current

e;ecuti0es of the company. Compensation of top e;ecuti0es is closely tied to company

performances. That is !hy the #ase salary represents the smallest percentage !hile stoc: option

has the #iggest share in compensation structure. Thus from corporate go0ernance perspecti0e

Caterpillar might loo: 0ery attracti0e to in0estors.● Caterpillar>s -i.idend olic$( Caterpillar follo!s a sta#le di0idend policy. 'espite the

fluctuations and do!n!ard trend in the mar:et for the industry Caterpillar continued to pay out

di0idend and e0en steadily increased through the years #y 1.19 per share in fi0e years.● Caterpillar>s Cost o Capital( Caterpillar return of de#t !hich indicates the return on its long

term de#t !as calculated to #e 1.33F. The company4s cost of e*uity !hich indicates the return

re*uired #y e*uity in0estors using the di0idend gro!th method and the CE+M method !as

1/.9F and 1/.53F respecti0ely. ECC !hich the a0erage cost of capital for Caterpillar #ased

on the mar:et perception of ris: !as calculated #ased on the t!o costs of e*uity calculations

resulting in ECC 0alues of %.$F and %.15F respecti0ely.● Caterpillar>s Capital /tructure( Caterpillar4s capital structure is 3%.%$F de#t and 22.2F

e*uity. The company has sufficient re0enue to co0er its interest !ith an interest co0erage ratio of

$. Caterpillar has a similar capital structure to its competitors and it recogni&es the need to adapt

its structure #ased on mar:et conditions.● 8aluation and /toc rice -eter'ination( Caterpillar4s -toc: price as reported in the stoc:

e;change on March 2% 2/1% !as 35.25 A,-'. ur model re0ealed a share price of %5.2/ ,-.

E comparison of #oth prices Amar:et share price and our price !ould suggest that CET is

currently o0er0alued. This result could also indicate that our assumptions are slightly off.

0erall !e !ould not recommend in0esting in this company at this time. Elthough Caterpillar has a strong corporate go0ernance structure and has #een esta#lished in the industry for *uite

some time !e #elie0e that the current stoc: price is o0er0alued. The company is also facing a

decrease in future cash flo! !hich !ill limit their a#ility to pay interest e;penses gi0en they are

hea0ily le0ered. Edditionally !hen loo:ing at Caterpillar4s li*uidity and asset turno0er ratio

Caterpillar4s competitors are doing #etter than they are. The company demonstrated minimal

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gro!th in 2/15 and their year to year gro!th has decreased dramatically o0er the past fi0e years.

8or these reasons !e !ould not recommend in0esting at this time.

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A#?-I@ A

-etailed acground inor'ation + Caterpillar>s -irectors

-A8I- )4 CA)!? is the director since 2/11 and ser0es as -enior Managing 'irector and

Head of +ri0ate 6*uity +ortfolio perations of The Blac:stone roup L.+. Apri0ate e*uity firm.

He is also the 6;ecuti0e Chairman of the Board of The ielsen Company B. Amar:eting and

media information. He is also the director at The Boeing Company.

-A?I#) M4 -ICI?/!? director since 2//% is currently Managing +artner of HCI 6*uity

+artners Apri0ate e*uity in0estment holds director position there too.

A? GA))AR-! is the director since 199$. He is currently Chairman of the Board and C6

of rgani&aciUn Culti#a -.E.B. de C.. the holding company for rupo 6++ -.E.+.I. de C..

A+epsicola #ottling group in Me;ico and rupo E&ucarero Me;ico -.E. de C.. Asugar mills.

He also ser0es as a director in rupo 8inanciero -antander -.E.B. de C.. and Lafarge -E.

#//# 4 GR##?#, R4 #eing director since 2/11 professor of corporate go0ernance and ris: management at Colum#ia Business -chool in e! Dor: City. He pre0iously held an e;ecuti0e

position in International Business Machines Corporation Acomputer and office e*uipment.

!? M4 ?&/MA?, R4 is former ,nited -tates Em#assador to China A2//9"2/11 and

former go0ernor of ,tah A2//5"2//9 !ho also ser0es as a director at Che0ron Corporation

8ord Motor Company and Hilton orld!ide.

-#??I/ A4 MI)#?BRG director since 2/11 is the +resident and Chief 6;ecuti0e fficer

of The Boeing Company Aaerospace<defense products and ser0ices since July 2/15.

-!G)A/ R4 !B#R#)MA? director since 2/1/ is currently Chairman and Chief

6;ecuti0e fficer of Caterpillar Inc. He also sits as a director at 6;;on Mo#il Corporation.

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:I))IAM A4 !/B!R? director since 2000, comes from orthern Trust Corporation and

holds directorship position at E##ott and eneral 'ynamics Corporation too.

#-:AR- B4 R/&, R4 director since 2// is currently Chairman of -tate 8arm Mutual

Eutomo#ile Insurance Company Ainsurance. Elso ser0es a s a director at Helmerich 7 +ayne

Inc. and Mcra!"Hill 8inancial Inc.

-#BRA )4 R##- director since 2/15 is C6 and the Chairman of the Board of 'irectors of

-empra 6nergy Aenergy ser0ices holding company. -he holds directorship at Halli#urton Co.

too.

//A? C4 /C:AB director 2//9 former ,- Trade epresentati0e is currently a +rofessor

at the ,ni0ersity of Maryland -chool of +u#lic +olicy and a -trategic Ed0isor for Mayer Bro!n

LL+.. -he ser0es as a director at 8ed6; Corporation Marriott International Inc. and The Boeing

Company as !ell.

MI)#/ -4 :I&# director since 2/11 is currently Chairman and Chief 6;ecuti0e fficer of

E##ott Apharmaceutical and medical products. He also ser0es as the director at E##ott and

Mc'onald)s Corporation.

Corporate Finance Firm Analysis-Caterpillar Inc

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