Important disclosures appear on the last page of this report.

Krause Fund Research

Spring 2018

Industrials Recommendation: HOLD

Analysts

Daniel Rosenberger

Daniel-Rosenberger@uiowa.edu

Charlie Lynch

Charlie-Lynch@uiowa.edu

Steve Diaz

Steve-Diaz@uiowa.edu

Delun Pan Delun-Pan@uiowa.edu

Company Overview

Caterpillar Inc. is a heavy machinery manufacturer

operating around the world in three distinct sectors:

construction machinery, resource equipment, and energy

and transportation systems. Its signature bright-yellow

machines have become a staple in construction sites and

many industrial applications. Its independent dealer

network and global supply chain allows for Caterpillar to

operate in over 190 countries in 3,500 locations, creating

over $45B in total revenues in 2017.

Stock Performance Highlights

52 Week High 173.24

52 Week Low 92.98

Beta Value 1.49

Average Daily Volume 6,206,627

Share Highlights

Market Capitalization 91.861 B

Shares Outstanding 596 M

Enterprise Value 118.42 B

EPS (FY 2017) $1.27

Forward P/E Ratio 26.0

Dividend Yield 2.06%

Dividend Payout Ratio 56.85%

Company Performance Highlights

ROA .99%

ROIC 9.33%

Sales 45.565 b

YoY Sales Growth (FY ‘16-‘17) 17.9%

Financial Ratios

Current Ratio 1.35

Debt to Equity 368.99%

Caterpillar Inc. (NYSE. CAT)

April 17, 2018

Current Price $152.14

Target Price $160-165

Key Investment Highlights

• Increasing order volume – Carrying over from 2018,

Caterpillar is looking to continue to capitalize on

increased order volume and a favorable economic

setting. Strong GDP growth as well as considerable

order backlog will continue the creating of new heavy

industrial machines.

• Commodity markets rebounding – Following

commodity markets crashing in 2016, Caterpillar is

capable of refilling demand as commodity prices

continue to rise in 2018. Latin American mining

operations are expected to increase substantially.

• Construction Growth in 2018 – North American

construction growth is set to increase another 4-6% in

2018, based on increased demand in single-family

home construction and increased infrastructure

funding.

• Limited Access to Capital Markets – Looking at the

future interest rate environment and a flattening yield

curve, demand for Caterpillar products is set to

decrease as it becomes more expense for customers to

finance the purchase of expensive, large machinery.

• Innovation within the Industry – Market share in the

heavy machinery industry in extremely tight and the

ability to create competitive advantages through

research and development, such as automation and

remote operation capabilities are key to controlling

future market share.

One Year Stock Performance

source: CNBC

Important disclosures appear on the last page of this report.

ECONOMIC ANALYSIS

GDP (Strength in the Economy)

GDP is used as a relatively strong indicator of the

Industrial sector due to its sensitivity to the industry.

With the large investments that we see in the sector,

clients are prone to purchase these goods while GDP is

increasing. As the chart below reflects, the industrials

sector has had a steady growth over the past three years,

from approximately $487 in April of 2014 to $615 as of

April 2018. The lighter blue line represents the

Industrial sector, while the dark blue represents the S&P

500. The similarity between the S&P 500 and the

Industrials sector indicates a high degree of correlation,

and helps analysts predict, on a more specific time line,

the adjustments that will be seen by the Industrial

sectors.

S&P 500 Industrials Growth (3 yr.)

S&P Dow Jones Indices1

GDP Estimates within 6 Months

The fourth quarter 2017 GDP beat estimates and came in

at 2.9% after ending 2016 at 1.8%. This GDP growth

fully explains the increase in the stock market as we saw

from September into the beginning of January. Those

increases were the market reacting to the new tax law

that was introduced by the Trump administration. Within

the first six months we are expecting to see an increase

of GDP growth to 3.1% due to increased spending by

companies taking advantage of new tax laws.

Trading Economics2

Global Real GDP

We believe that the GDP will continue to grow and will

reach a growth range of 3.3%-3.7%. We are expecting

the new tax bill to raise GDP with an increase in

consumer spending and stronger business investments.

We are also expecting manufacturers to benefit from

stronger exports as the global economy continues to

strengthen in the future. Because a large part of

Caterpillar’s revenues comes from overseas sales

(roughly 54%), it is important that we recognize the

Global GDP and factor this into our forecasts. The

global real GDP growth rate is currently sitting at 3.7%,

with a general consensus that this rate will not change

drastically within the next year staying consistent at

3.7%.

Interest Rates

Interest rates today are extremely important to the

economy because many companies need to borrow

capital for their investments. Currently, the 10-year

interest rate on a U.S. treasury bond is sitting at 2.83%,

which is the rate most companies base their borrowing

ability on. The Fed recently increased the short-term

rates from 1.25%-1.50% to a range of 1.5%-1.75%, the

first rate hike of three or possibly four that we expect to

see this year. Infrastructure, capital expenditures,

agriculture, and transportation sectors all rely on

borrowing capital to finance various projects. If interest

rates continue to grow, companies will not borrow as

much capital to invest in their projects and we could

quite possibly see a decrease in Industrial

manufacturing, which in turn could lower GDP.

Historical 10-yr Treasury Rates

U.S. Department of Treasury3

Exchange Rates

Exchange rates in today’s market are extremely

important due to the increasing globalization of

companies, specifically the increase in Industrial

companies around the world. Exchange rates that are

focused on most are the Japanese Yen, the Euro, and the

Important disclosures appear on the last page of this report.

U.S. Dollar. Currently, the Japanese yen is trading at

$107.34 per US Dollar and the Euro is trading at $0.81

per US Dollar. Generally, when companies are

generating revenues over seas, they will keep the

revenue in the respective companies.

Tax Rates

This year marks a big year in economic history with the

new tax bill that was introduced by President Trump’s

administration. This bill decreased the top corporate tax

rates from the 35% rate we have had since 1986 and

decreased this rate to 21%. Following the decrease in the

tax rate, we expect an increase in foreign tax benefits

that we receive from -6.4% to about -1%. This is due to

the United States having a tax rate that is more in line

with a majority of other countries we trade with. We

anticipate seeing a decrease in the amount of deferred

taxes that companies keep on their balance sheets

moving forward. With this new tax rate, we will see

higher net income reported for companies and increase

their balance sheet.

Unemployment

Unemployment is at an all-time low of 4.1% since 2001,

and has been at this level since October 2017. With

unemployment so low, this can cause some issues in

terms of labor costs for companies. With unemployment

staying low, the ability to find new employees decreases

which means labor costs will increase in order to attract

new workers. As labor costs increase, companies will

need to increase their product prices to cover the

increase in labor. We already see a small increase in

hourly earnings from the past quarter, increasing from

2.6% to 2.7%.

Trading Economics4

We are expecting a small increase in unemployment

over the next year to 4.4%. We expect the number of

people in the work force to increase with people who are

currently not in the work force but who see the stagnant

rate and are drawn back to the work force. As the

number of people within the work force increases, we

are also expecting GDP to rise with the increase in goods

and services being produced.

INDUSTRY ANALYSIS

Industry Overview

The industrial machinery sector holds a large spectrum

of sub-industries. Caterpillar operates under the heavy

machinery sector. For our purposes we will be analyzing

three specific sub-industries within the sector:

construction machinery, mining and resource equipment,

and energy and transportation machinery. However,

these sub-industries tend to have similar characteristics

when considering key drivers, trends and environments.

Companies within these sub-sectors, including

Caterpillar, are extremely sensitive to the global

economy and its health largely due to their global

positioning and historical correlation with markets. In

order to sell their products effectively, companies use

independent dealers to distribute and sell their products.

Lastly, due to consolidation, many of these companies

have a large presence in many different sub-industries

and therefore may be difficult to compare.

Key Industry Drivers

GDP Growth

Heavy machinery has a high dependency on stable

market conditions. Consistent growth levels and a stable

economic environment, including consistent GDP

growth, increases product demand because consumers

can more accurately predict if they will be able to

commit to large capital expenditures. For example, total

industrial production has closely tracked real GDP in

recent years and we can expect this trend to continue

looking forward.

St. Louis INDPRO and GDPC1 Indexes5,6

Commodity Prices

Companies in the sector are highly sensitive to changes

in certain commodity prices, specifically steel.

Commodity prices are relatively stable through recent

times, however with recent import tariff plans by

-5.0

0.0

5.0

10.0

2010 2011 2012 2013 2014 2015 2016 2017

Per

cen

t C

han

ge

Real GDP vs Total Industrials Prod.

Real GDP Total Industrials Production

U3 Unemployment Rate 2014 - Today

Important disclosures appear on the last page of this report.

President Trump, we see large changes in steel prices

within the next year. As of this report, there is an

announced 25% tariff on steel and a 10% tariff on

aluminum imports, which would result in an anywhere

from a 6-20% decrease in EPS estimates for companies

in the industrial machinery sector, according to analysts

at J.P. Morgan7. However, from our perspective, we see

the 25% tariff as a worst case scenario and recommend

that these tariffs be met with a high level of skepticism

until future advancements in tariff talks are made.

Hot-rolled Coil Steel from 2011 – Today8

Within the next year, we see steel prices continuing to

increase but at a slower rate. This will inhibit growth

within the industry in the short term, however if the

recent easing of trade war talks is any sign, we could see

this recent run up in prices reverse.

Capital Spending

Sales volume in the industrials sector is heavily reliant

on capital expenditures. Customers, both individuals and

corporations, rely on favorable capital markets in order

to make heavy machinery purchases. Recent years have

been a great environment for capital spending. With

equity markets at all-time highs and interest rates at

extreme lows, we saw many companies take advantage

and capital spending flourish. Looking ahead, with fed

rate hikes scheduled to take place, upward pressure on

interest rates is causing a final boost in capital spending

levels. We see this cycle in capital expenditure growth

coming to an end in 2018 and expect a decrease in later

years as the effects of increasing interest rates reduce

capital spending.

Industry Trends

Increased Order Volume

Order volume within the industry has increased

dramatically in 2018 and will serve as strong support for

continued revenue growth in the upcoming year.

Purchasing Managers Index (PMI)

The PMI index is a monthly measure of five seasonally

adjusted diffusion indexes. Each measure is evenly

weighted; the PMI is comprised of new orders,

production, employment, supplier deliveries, and

inventories. A measurement over 50 indicates improving

conditions.

ISM Purchasing Managers Index8

Through 2017 and further into 2018, PMI has been

considerably stronger with an increase in new orders and

production along with low unemployment.

New orders are set to settle before the end of 2018 as

capital spending slows, however production and supplier

deliveries will remain high as orders are fulfilled.

New Orders

New orders are a key statistic to understanding the

current demand environment. The Durable Goods report

for Manufacturers’ is a figure used to see new orders in

the last month. In 2018, we have seen strong increases in

new orders with a 7.4% increase in new, nondefense

capital goods orders.10

Order Backlog

Order backlog is an indicator for expected future

revenues. It is the accumulation of unshipped orders. In

2018, we’ve seen a strong trend of increasing backlog

among manufacturing firms. Based on the Institute for

Supply Management’s Backlog Index, March and

February registered 59.8% (50% indicates normal).11

Date % Higher % Same % Lower Index

Mar-18 32.1 55.4 12.5 59.8

Feb-18 31.8 56 12.2 59.8

Jan-18 27.8 56.8 15.4 56.2

Dec-17 25.6 58.6 15.9 54.9

Order Backlog Index from ISM11

On average, 30 percent of manufacturing firms reported

higher order backlogs. Caterpillar, for example, reported

a $3.9 billion increase in order backlog for the 2017. We

see these increases in backlog as an effect of the current

stable economic environment. As noted before, the

capital spending trend in the last 12 months has pushed

35

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55

60

65

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r-16

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Au

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v-16

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Ap

r-17

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ISM Purchasing Managers Index

Important disclosures appear on the last page of this report.

order volume and created a healthy amount of order

backlog for the coming year and even further into 2019.

Competitive Environment

The heavy machinery industry as a whole is moderately

fragmented. We see competition in this sector vary

heavily between companies depending on geography and

even individual orders. Therefore, comparing companies

can become quite difficult when they may compete in

complete different areas of the world. As with any

industry, price competition is to be expected, however,

the machinery industry also competes based on the depth

of their product offerings, such as their ability to fulfill

the customer’s wants and their compatibility with the

customer’s facilities or needs. When considering larger

sales to other companies or governments, product

compatibility is the key determinant in whose product

gets bought. Companies that can adapt their products or

diversify their product line in order to fit multiple

customer’s pre-existing factory footprints have a large

competitive advantage over others.

Industrial Automation

Research and development in the heavy machinery

sector has had a specific focus to create and improve

automation within the construction and mining

industries. Companies advance the idea that the

automation of processes will reduce labor costs, improve

consistency in product quality, reduce waste, and make

available real-time feedback and diagnostics for

increased job efficiency.

Currently, the industry’s level of automation is

constricted. Applications involving autonomous use are

limited to repetitive tasks and the types of technology

used are similar to that of self-driving vehicles, such as

GPS and a mix of RADAR and LiDAR sensors.12 The

mining industry is one of the biggest benefiters of such

technology. Bulldozing, hauling materials, and remote

operation in underground environments are key

examples of modern-day applications.

In the future, we see automation as a major competitive

advantage in the industry. The benefits of eliminating

human error for customers and at the same time reducing

expensive labor costs for jobs such as crane or other

large machinery operators is a major need among the

heavy machinery consumer base.

Construction Demand in North America

For companies in the heavy machinery industry,

construction products sold in North America make up a

considerable amount of revenue every year. Estimates

for this area see a 5% growth in 201813 and we believe

through the demand of residential and non-building

construction that these estimate are within reason,

however we meet them with some skepticism.

Residential Construction

New residential construction in the U.S. is a large

variable in overall demand. Privately-owned housing

starts over the last 10 years have been steadily

increasing, but still have not reached pre-Financial Crisis

levels.14 Under current growth levels, those levels will

not be reached until 2022. However, today the cost to

build a home compared to 2005 is 26.2% more and

increasing at a concerning rate.13 Into 2018, our

estimates see residential construction to still grow

around 4-6%, but we have some skepticism in the years

beyond as the cost to build increases and see growth

slowing to a more conservative rate.

Non-Building Construction

Non-building construction, such as roads, bridges, and

other infrastructure have a somewhat positive outlook in

2018 and the potential for a large upside. Government

transition from the FASTLANE initiative into the

Infrastructure for Rebuilding America, or INFRA,

program has sparked the building of new highways and

the construction of multiple bridges. However, unless

considerable legislation on a proposed “Rebuild

America’s Infrastructure” plan takes place in mid-2018,

we believe reelections are pushing any large

infrastructure bill far into 2019. Assuming this,

infrastructure should only grow at moderately normal

rates, or 3-4%.

Industry Metrics

The following section shows comparable metrics within

the heavy machinery industry. Among Caterpillar,

competitors such as Cummins, Inc., Komatsu, Hitachi

Ltd., and Volvo, all manufacture and service heavy

machinery applications in a diverse set of product lines.

Gross Margin

Competitive pricing has had quite an influence on gross

margins within the industry. Typically, gross margin is a

proper gauge on the performance of a company within

its industry. A company’s ability to control its operating

costs, as well as its capability to demand a premium

from customers are key advantages within any industry.

In 2017, Caterpillar had the second highest gross margin

of its main competitors, reporting at 28%15. Just ahead is

Komatsu at 28.65%16. We believe Caterpillar is

controlling its costs well and expect it to increase their

operating margin in 2018.

Important disclosures appear on the last page of this report.

15, 16, 17, 18, 19

Operating Cash Flow/Sales Ratio

The ratio of operating cash flow to sales shows us the

capability of a company to translate value to

shareholders through day to day activities. This metric is

key to understanding the financial stability for a

machinery company. The larger the operating cash flow,

the less concern over a company’s ability to access

external financing, pay down debt, or provide dividends

to shareholders.

Caterpillar produced a 12.54%15 operating cash

flow/sales ratio in 2017, placing them near the top of

comparable firms and above the average of 11.6%.

Again, Komatsu leads the industry at around 14.21%16.

With the changes in tax rates, Caterpillar, along with the

rest of the industry, stands to improve its operating cash

flows/sales ratio in 2018 by a noticeable margin.

15, 16, 17, 18, 19

R&D Expense/Sales

Research and development (R&D) expense/sales is a

metric that demands attention. The machinery industry

has a high dependence on its ability to use future

technology to improve efficiency of its machines and

add new value. A company’s ability to effectively fund

their research and development department supports a

positive future outlook due to its ability to create

sustainable advantages.

Caterpillar has a strong, uncontested lead in R&D

funding compared to competitors with an R&D expense

to sales ratio of 11.39%. Second in our comparable

group is Volvo at 4.81%19. Based on the chart below we

can assume Caterpillar is in the best position to create

technological improvements to their product line and

establish competitive advantages through their research

and development department.

15, 16, 17, 18, 19

Porter’s Five Forces

Threat of New Entrants: Low

As a whole, barriers to entry of heavy machinery

industrials are high. The amount of capital needed to

manufacture the large pieces of machinery alone is

enough to keep many new possible entrants out. Once

the other hurdles are considered, such as various

government regulation and policy, name brand loyalty,

patents, proprietary knowledge, and the cost of

switching facilities to accommodate the manufacturing

of new products, it is easy to understand how difficult it

is to enter the industry.

Threat of Substitution: Moderate

The large companies within the industry have enough

differentiation between products so that each has diverse

offerings or unique service terms. As stated, substitution

from new entrants is unlikely due to the high capital

requirements. However, substitution from existing

competitors is still an ongoing concern for firms and

likely to persist in the future.

Power of Suppliers: Low

Supplier bargaining power is based upon material or

product scarcity, competitor demand, supplier size, and

switching costs. In the heavy machinery industry,

companies source materials from various suppliers

around the world. The likelihood of a single supplier

having the ability to pressure the large players within the

heavy machinery industry is extremely low. For every

input in the machines created by any particular supplier,

there are multiple suppliers able to provide them with

the same input.

Power of Buyers: Low

Buying power for the customers of large heavy

machinery is low due to the imbalance between

companies that sell heavy machinery and the number of

28.00%

24.92%

28.65%

25.66%

23.95%

26.24%25.66%

20.00%

22.00%

24.00%

26.00%

28.00%

30.00%

CAT CMI Komatsu Hitachi AB Volvo Average Median

Gross Margin

12.54%11.15%

14.21%

8.86%

11.23% 11.60% 11.23%

0.00%

5.00%

10.00%

15.00%

CAT CMI Komatsu Hitachi AB Volvo Average Median

Operating Cashflows/Sales

11.39%

3.68% 3.91%

1.60%

4.81% 5.08%3.91%

0.00%

5.00%

10.00%

15.00%

CAT CMI Komatsu Hitachi AB Volvo Average Median

R&D Expense/Sales

Important disclosures appear on the last page of this report.

customers. This is even more severe as we consider the

larger firms within the industry. The number of firms

that can provide large orders and produce the specific

product requested in the industry heavily disfavors

customers.

Competitive Rivalry: High

Despite the low number of competitors in the heavy

machinery industry, competition among the few

comparable firms is intense. Companies in the industry

are heavily invested in international markets. Due to this,

firms more likely find themselves having to compete

against other firms in their respect domestic markets.

Despite this disadvantage, companies can still create

competitive advantages in the industry, through supply

chain management or effective R&D.

COMPANY ANALYSIS

Company Overview

Caterpillar Inc. is a heavy machinery manufacturer

operating in three distinct sectors: construction

machinery, resource equipment, and energy and

transportation systems. Their eye-catching, signature

yellow machinery is seen around the world. Caterpillar’s

strong position in global markets has resulted in 54%15

of sales revenues coming from outside of the U.S. and

75% of their independent dealer network selling

products such as backhoe loaders, wheel dozers, and

skid steer loaders.

Business Segments

Construction Machinery

Caterpillar’s construction segment offers customers a

range of machinery in infrastructure and building

construction applications. The product line includes

backhoe loaders, small track-type tractors, mini

excavators, and many heavy industrial trucks. In 2017,

the construction segment accounted for 42% of total

revenue. Looking forward, our estimates show the

industry to continue growing through North American

construction demand and rising urbanization in

emerging markets.

Resource Machinery

The resource industries segment is responsible for

providing customers machinery applicable in mining

and quarry environments. Some of the products offered

include electric rope shovels, draglines, track and rotary

drills, and off-highway trucks. As of December 31,

2017, this segment contributed only 16.5% to total

revenues. After a relatively large reduction in recent

years, we see strong growth in this sub-sector. The

recent downturn in commodities has resulted in strong

sector consolidation. Caterpillar, now standing as the

industry leader in mining equipment, will benefit to a

significant degree as the commodity sector recovers.

Energy and Transportation Machinery

Energy and transportation machinery made by

Caterpillar is primarily focused on producing products

that serve customers in oil and gas, power generation,

marine, rail and, and industrial application. Specific

examples include reciprocating engines, generator sets,

gas turbines, diesel-electric locomotives, and other rail-

related products and their respective services. In 2017,

energy and transportation was responsible for 35.2% of

revenues for Caterpillar. Given this segment is

prioritized to the petroleum and power industries,

production is extremely sensitive to oil and gas

infrastructure and production in North America and the

Middle East.

Financial Products

Caterpillar’s financial products segment allows

customers to finance in retail and wholesale settings

through CAT Financial. Independent dealers also use

CAT Financial in order to purchase and lease

Caterpillar and other equipment. Financing plans

include operating and finance leases, installment sale

contracts, working capital loans, and wholesale

financing plans. Along with financing services, they

also provide customers with insurance to help

support purchases and lease agreements. As of 2017,

CAT Financial contributed 6.1% of total revenues. In

2018 and beyond, CAT Financial will likely see

growth simply from increased sales volume, but as

interest rates rise, it will struggle to maintain

previously low financing rates and may find it harder

to stay competitive among other financing options

available to consumers.

Caterpillar 2017 10k15

42%

16%

35%

6%

Revenue Breakdown by Industry

Construction Resouce Energy & Transportation Financial Products

Important disclosures appear on the last page of this report.

Financial Summary

Caterpillar generated $45.57B in revenue during

2017, due in part to a strong rebound in resource

equipment sales. North American growth in

construction and energy & transportation markets

drove growth in revenues. In 4Q 2017, Caterpillar

reported $12.9 billion, a YoY increase of 34.4%.20

Despite impressive sales performance in 2017,

Caterpillar struggled to turn the sales into net

income. In 2017, the company finished with a total

profit per share of $1.26. High restructuring costs,

mark-to-market losses due to remeasurement of

pension and other post-employment benefit (OPEB)

plans, and large adjustments due to the impact of

U.S. tax reform caused considerable EPS decreases.

Ignoring these adjustments, CAT reported an

adjusted profit per share of $6.88 for the year.

Looking forward, management believes 2017 sales

momentum will provide strong headwind into this

year.

Recent financial years for Caterpillar have proven to

be difficult. In the last two out of the three years, all

three industries that Caterpillar serves reported at

least an 8% decrease in total revenue15. Their

resource industry has halved revenues since 2012

due to a collapse in global commodity markets.

Fiscal year 2016 was the first time Caterpillar

reported negative earnings in over 20 years.

Despite these setbacks, Caterpillar stands to

capitalize on the rebounding commodity markets and

therefore see considerable growth in their resource

machinery industry sales. Furthermore, strong

construction demand in North America will spill

over from 2017 into the first half of 2018, bolstering

earnings for at least the first two quarters. In

conclusion, our team is optimistic about revenue

growth in 2018 and financial performance in general.

Analysis of Recent Earnings Release

Caterpillar reported its most recent earnings on

January 25, 2018, releasing performance for Q4 in

2017. Year-over-year growth was 34.4% compared

to 2016. However, given the $3.91 decrease in per

share profit due to to U.S. tax reform legislation,

Caterpillar finished their most recent quarter at a loss

per share of $2.18, a YoY decrease of 9%.

In terms of forward guidance in the report,

management notes growth based on increased

volume in end-user markets, commodity price trends

and the financial health of mining companies, and

the continuation of increased demand for equipment

used in electric power and agricultural end-user

applications and their respective services20. Our team

sees resource sales volume continuing well into

2018, led by demand in the copper, iron ore, and tin

markets. With all end-user markets looking to

continue rebounding from 2016 lows, Caterpillars

extensive order backlog and advantageous dealer

system gives the company plenty of opportunity in

2018 to outperform.

Production and Distribution

Caterpillar’s production and distribution system is an

industry leader and gives Caterpillar a strong

competitive advantage in their ability to source

materials, actively distribute products, and efficiently

service existing equipment anywhere in the world.

The commitment to globalization has allowed them

to reach emerging markets more quickly and

improve product distribution to the far ends of the

world. By building and maintaining strong

relationships with over 175 independently run

dealers in over 3,500 locations21, they reap the

benefits of both the knowledge and understanding of

local geographic needs, as well the capacity to offer

the premium and diverse product line of an

international company. This formula of local dealers

and global production has worked well to give

Caterpillar considerable market share in these areas.

Catalysts for Growth and Change

Realization of R&D Efficiencies

Caterpillar’s growth is highly dependent on its

ability to realize the performance of its research and

development into value in products and services.

Whether it be through something as simple as

creating better performing products through stronger

materials or something innovative and pushing to

new areas of growth such as creating automation

software, Caterpillar has had a history of bolstering

research and development within their company.

Their high dependence on being both the first and

the best at revolutionizing heavy industrials is

certainly a driver for growth in the company and

their industry.

Urbanization of Emerging Markets

The global trend of urbanization is a key source of

finding future growth in Caterpillar’s construction

and energy industries. Areas such as China and the

Middle East have grown and revenues for Caterpillar

in these areas shows it. In 2017, construction growth

in both regions increased revenues more than $2

billion more in revenue when compared to 2016,

Important disclosures appear on the last page of this report.

reaching a total of $9.9 billion. We believe these

regions will continue to demand a high volume of

Caterpillar products as development continues to

grow in 2018.

Rebounding Commodity Markets

Crashing commodity markets from mid-2013 into

Q2 of 2016 destroyed any demand for Caterpillar’s

resource industry products. The graph below shows

an index of global commodity prices from 2013 to

now. Given a benchmark of 2005, the index fell 98

points from 184 in Q3 of 2014 to 86 in Q2 of 2016.

Since then, we have seen a soft rebound in

commodity markets through metals such as Copper,

Aluminum, Tin, and Zinc. For Caterpillar, these

materials are key to driving resource demand growth,

especially in areas such as Latin America where

copper, tin, and zinc mining is plentiful.

Continuation of rising commodity prices from 2016

and 2017 are key to growing revenues for Caterpillar

in the coming years.

i Global Commodity Index, 2013-Today22

S.W.O.T. Analysis

Strengths

Extensive Dealer/Distribution Network

As stated previously, Caterpillar’s independent

dealers combined with a global distribution network

is the perfect combination to serve the 190 countries

they operate in. Compared to their competitors,

Caterpillar is able to expand its already large

customer base and capture market share in smaller

markets where rapid growth is possible.

Brand Recognition

Caterpillar’s brand portfolio is recognized as the

most valuable heavy equipment manufacturing brand

in the world. It gives Caterpillar a strong advantage

when entering new markets, as customers will

habitually prefer the familiar choice. Beyond the

obvious Caterpillar and CAT Financial brands, they

own other brands such as Electro-Motive, HYPAC,

CouplingAsiaTrak, and many others23.

Forward emphasis on R&D

Caterpillar’s emphasis on innovation and future

technology is a key to building future competitive

advantages within the industry. Over the past seven

years, their research and development spending has

averaged over $2.2 billion a year15, exceeding any

other mining and construction equipment competitor

on a basis of percentage of sales. Caterpillar has been

the headwind of innovation and technology

development in the heavy machinery industry and as

we look to the future, this trend will continue for

years to come.

Weaknesses

Amount of Debt Obligations

Caterpillar’s debt obligations are not to go unnoticed.

Their debt to equity ratio was 368.99 in 2017 and

total debt on their balance sheet stands just above

$36 billion. Looking at competitors, Caterpillar has

to handle a considerable proportion more in

corporate debt obligations based on sheer market

size. Knowing this, Caterpillar still holds on to a

stable A rating from the S&P for their debt. They

have a consistent track record for paying off debt

early and recently, they were able to pay off $900

million due in December of 2018.

Pension and OPEB plans

Post-employment liabilities are another ongoing

issue with Caterpillar’s financial situation. As of

December 31, 2017, Caterpillar has $8.37 billion in

underfunded pension liabilities. This is actually quite

common in the heavy manufacturing industry, as

comparable companies such as General Electric have

up $30 billion in pension liabilities to account for. As

it stands now, these underfunded pension plans do

not pose an immediate effect on Caterpillar’s

business, however future environments could cause

this to change.

Opportunities

Future of Automation

Industrial automation is currently a race between

many of the large players in the heavy machinery

industry. New applications are being tested and

applied every new iteration of products. Caterpillar

and their trend of heavy R&D spending has put them

in a favorable place to make the first moves in

innovation.

Outlook of Global Renewable Energy Markets

The global renewable energy market is robust and

growing. The industry grew at a CAGR of 9% since

2015 and is still poised to continue growing at a

Important disclosures appear on the last page of this report.

similar rate. To take advantage of this, Caterpillar

has made moves such as an alliance with First Solar

to develop photovoltaic solar solutions for micro-

grid application. They also made a deal to distribute

Cat-branded solar panels manufactured by First

Solar. In the near future, Caterpillar has the ability to

continue making advancements in the renewable

energy sector and create market share within the

industry.

Threats

Impact of Government/Fiscal Policy Change

Changes in government throughout the world happen

almost constant and the ability to keep up with

policy change in over 190 countries is justifiably

impossible. Changes in government could inhibit

future operations within a country and changes in a

countries interest rate environment would alter sales

of Caterpillar’s products. For instance, current

interest rate hikes are hindering customers’ ability to

finance machine purchases, ultimately driving

revenue lower.

Possibility of Market Correction

Caterpillar’s revenue has a high correlation with

consistent and positive economic growth. The

possibility of a market correction with greatly affect

profitability of the company and create serious

concerns over how the company would repay their

considerable amount of debt obligations.

VALUATION ANALYSIS

Valuation Summary

Our process for determining the value of a single

share of Caterpillar stock involves the application of

various pricing models, such as the Discounted Cash

Flow and Economic Profit models, the Dividend

Discount model, and a Relative Valuation model

with variables such as relative P/E and PEG ratios

based upon a select number of Caterpillar’s direct

competitors and comparable companies. In order to

use these models, we used a number of assumptions

as follows.

Key Assumptions

Revenue Decomposition

Our basis for breaking down revenue is by breaking

up each heavy machinery segment into four different

geological areas: North America, Latin America,

EAME (Europe, Africa, and the Middle East), and

Asia/Pacific regions. From there, we were able to

grow each machinery segment in each region by

various changing annual growth rates.

North America

Out of the four geographic regions, North America

has contributed the most to Caterpillar’s revenue

streams. Sales from North America make up 46.60%

of Caterpillar’s total revenue. As identified above,

construction in North America is expected to

increase by 4-6% in 2018, pushing revenue from this

area even higher. There is also opportunity for

CAT’s energy sector to benefit from increasing oil

and gas activities such as fracking. Compression

units built by Caterpillar are used for many of the gas

and oil transportation applications around the United

States. Due to these sources of demand, we see high

potential and upside to North American revenues in

future years.

Latin America

Revenue from Latin America has been the smallest

contributor to Caterpillar’s total revenue by

geological area. In 2017, only 9.13% of total sales

came from the area, due to unstable economic

conditions preventing customers from being able to

rationalize the purchasing large machinery.

However, Latin America stands to benefit greatly

from increased viability of commodity mining, such

as copper, tin and iron ore. Our estimates assume

strong double-digit growth in this region as

commodity mining reestablishes itself in the area.

Caterpillar 2017 10k15

Europe, Africa, and the Middle East

EAME saw strong sales growth in 2017 primarily

due to higher end-user demand and favorable price

realization. CAT’s resource and construction

industries saw 60% and 56% increases in fourth

46.60%

9.13%

22.64%

21.24%

Revenue by Geographic Region

North America Latin America EAME Asia/Pacifc

Important disclosures appear on the last page of this report.

quarter revenues from 2016 to 2017. We believe

improved economic stability across these regions

combined with the demand from urbanization in

emerging markets in these geographic regions will

continue growth into the coming years.

Asia/Pacific

Asia, specifically China, is creating demand through

increased building construction and infrastructure

investments. Fiscal year 2017 was an impressive

year for construction heavy machinery sales in Asia

and the Pacific, boasting a 46.5% return compared to

2016. Higher sales volume and favorable price

realization heavily offset the higher material costs. In

2018, we see sales volume remaining high until Q2.

Increasing material costs, primarily steel, will inhibit

a lot of the growth later on into 2019.

Gross Margin, Other Expenses

Caterpillar’s cost of sales has historically stayed

consistent and we see current levels of cost control

as unchanging in our forecasts. This makes sense

given that Caterpillar has remained in the heavy

machinery industry for a substantial amount of time

and cost structures have been able to reinforce

themselves. Since 2008, Caterpillar’s gross margin

has ranged from 27-30%, with a most recent upside

of 31% in 2017. Their continued commitment to

efficiency and cost control is to be expected in the

coming years. We believe a gross margin close to

30% will effectively capture this idea.

As for other expenses and their forecasts, we used a

compounded annual growth rate (CAGR) as well as

historical averaging in order to estimate. Items such

as R&D, SG&A, and other operating expenses are all

taking this approach.

Marginal Tax Rate

In December of 2017, the U.S. government passed a

bill to change the effective corporate tax rate from

35% to 21%. Before this change, we calculated

Caterpillar to have around a 28.8% marginal rate.

We estimated this rate by taking the 35% U.S.

corporate rate, subtracting 7% in deductions from

non-U.S. subsidiaries taxed at other than 35%, and

then adding .8% back in state and local U.S. taxes.

Looking forward after recent tax legislation, we see

the foreign deductions eliminated almost completely.

We estimate a 20.8% marginal 2018 rate by taking

the new 21% federal rate, subtracting only 1% now

in foreign deductions, and then adding back our

unchanged .8% in state and local tax.

Weighted Average Cost of Capital (WACC)

Our group calculated Caterpillar’s WACC to be

7.41% through a Capital Asset Pricing Model for the

cost of equity and a corporate debt proxy for the cost

of debt. We weighted these costs using a 71.35%

weight in equity and a 28.65% weight in debt given

their current market values. Our calculations are as

follows:

Cost of Equity

To derive Caterpillar’s cost of equity, we used a risk

free rate of 2.97%, an equity risk premium of 4.8%,

and a raw beta of 1.295. Our risk free rate is based

upon the current yield of a 30-year U.S. Treasury

Bond24. The market risk premium of 4.80% is the

geometric average of the market premium from 1928

to today25. Finally, our beta is an average of various

raw beta regressions through Bloomberg terminals.

After comparing multiple weekly and monthly betas

over various term lengths, we found 1.295 to be the

most appropriate measure of Caterpillar’s risk

exposure to the market. Using CAPM, we ended

with a cost of equity of 9.19%.

Cost of Debt

When calculating Caterpillar’s cost of debt, we first

found the yield to maturity on a long horizon debt

instrument that closely compared to a 30-year

Treasury Bond. Given the large amount of debt

issued by Caterpillar, we were able to find a

corporate bond maturing in 2047 with a yield to

maturity of 3.75%26. In order to capture the tax

benefits of the debt, we took this rate multiplied by 1

minus the marginal tax rate, giving us a final cost of

debt of 2.98%.

Valuation Models

Discounted Cash Flow & Economic Profit

Between each of the models used in this valuation,

we believe the Discounted Cash Flow model and the

Economic Profit model are the most accurate

estimates for the intrinsic value of Caterpillar’s

stock. Using both models, we were able to reach a

price of 164.05. A common criticism of the model is

its weight in the continuous value (CV), also known

as the terminal value. In our model we used a

conservative CV growth rate of 3.75% to limit a

chance of overvaluing Caterpillar in their continuous

state. We also used a CV return on investment

capital of 15%, which matches an average of our

forecast period. Based on the results of this model

we give Caterpillar a HOLD rating.

Important disclosures appear on the last page of this report.

Dividend Discount Model

Our team determined the dividend discount model is

not an acceptable measure of Caterpillar’s intrinsic

stock price. Using DDM, we derived a price of

92.88, which is far below what Caterpillar is valued

at today. We assume that the low price to earnings

multiple in our CV year is what is driving our

model’s output far below than what we would

expect. Given this result, we do not believe that the

dividend discount model should be used in

consideration of how to value a share of Caterpillar

common stock.

Relative Valuation Model

Similar to the Dividend Discount Model, we

determined that the Relative Valuation Model is not

a valuable measure of estimating the intrinsic value

of Caterpillar stock. We used two figures to measure

how Caterpillar would be valued as an average of its

peers. First, we used the relative price to earnings

multiple, or P/E, of Caterpillar’s peers and multiplied

it by Caterpillar’s EPS estimate for 2018 and 2019 in

order to get an implied relative value of $83.72 and

$94.38, respectively. The reasoning behind using this

model is due to the fact that many of Caterpillar’s

direct competitors and comparable peers have a

much lower P/E ratio when compared to CAT.

Looking at our 2018 industry P/E average of 14.51,

it is almost half of Caterpillar’s P/E of 26. The

second relative metric we used was the Price to

Earnings Growth (PEG) ratio. Using the PEG ratio,

we calculated CAT’s relative value to the industry

average to be $32.88 in 2018 and $36.39 in 2018.

Given the slow rate that we estimated Caterpillar to

grow their EPS by in the next 5 years, this skewed

our model heavily towards a lower price. With that

being said, we advise to ignore the results of the

Relative Valuation analysis given Caterpillar’s

abnormal P/E ratio to its industry and slow future

growth in EPS.

SENSITIVITY ANALYSIS

CV ROIC vs. CV Growth

In comparing these two metrics, our goal was to

understand the effects of our continuing value

metrics on our intrinsic value. Considering the CV of

any model can heavily determine the final price, it is

important to understand how sensitive our price is to

a change in steady state assumptions. Based on an

ROIC spread from 13-17% and a CV growth spread

from 3.35%-4.15%, we found that Caterpillar’s

intrinsic stock price could range from $146.68 to

$185.25

Gross Margin vs. SGA Expense

In comparing these two metrics, our goal was to

understand the effects of Caterpillar’s future cost

structure on its stock price. Since we project

Caterpillar to increase revenues in our forecasted

years, we also made the assumption that its Gross

Margin would increase. Given a gross margin

between 30-32% and SGA as 9.6 to 12% of total

revenue, our analysis yielded a price range of

$128.69 to $199.41.

Marginal Tax Rate vs. Cost of Debt

In comparing these two metrics, our goal was to

understand how each metric would affect our stock

price given then both influence our WACC and other

forecasted estimates. Given the change to recent tax

corporate tax rates, we may have made a mistake in

Caterpillar’s foreign tax benefit. This sensitivity

analysis will allow us to capture a range of possible

outcomes. We used cost of debt as one of our inputs

to estimate any future changes in Caterpillar’s debt

structure, such as a change in debt rating, to its stock

price. Given these variables, our analysis gave us a

price between $168.24 and $159.84.

Risk Free Rate vs. Beta

In comparing these two metrics, our goal was to

understand the effects of change in the risk-free rate

and beta as variables in our cost of equity. Given the

possibility of three to four rate hikes and its effect on

the risk-free rate, we wanted to capture a range of

different possibilities given how severe interest rates

change in our forecast. As for our beta, we made an

Important disclosures appear on the last page of this report.

assumption to average out various betas in our

valuation. In order to capture any error in our beta,

we can view this analysis to understand any changes

in perceived risk for Caterpillar. Our analysis below

yielded a price between $182.29 and $148.74.

Market Weight of Debt vs. Equity Risk Premium

In comparing these two metrics, our goal was to

understand the effects of Caterpillar’s proportion of

debt and our assumption of a 4.8% risk premium.

Changes in our equity risk premium show a large

swing in price, meaning our valuation is extremely

sensitive to our assumed risk premium. Our

sensitivity to the market weight of debt is important

to capture because as Caterpillar makes payments on

their upcoming debt and decides to take on new debt,

it effects their WACC and their intrinsic value of

stock. Our analysis found that given changes in these

variables, the intrinsic value of Caterpillar stock

could vary between $204.51 and $137.97.

Important disclosures appear on the last page of this report.

Important Disclaimer

This report was created by students enrolled in the Security

Analysis (6F:112) class at the University of Iowa. The report

was originally created to offer an internal investment

recommendation for the University of Iowa Krause Fund and

its advisory board. The report also provides potential employers

and other interested parties an example of the students’ skills,

knowledge and abilities. Members of the Krause Fund are not

registered investment advisors, brokers or officially licensed

financial professionals. The investment advice contained in this

report does not represent an offer or solicitation to buy or sell

any of the securities mentioned. Unless otherwise noted, facts

and figures included in this report are from publicly available

sources. This report is not a complete compilation of data, and

its accuracy is not guaranteed. From time to time, the University

of Iowa, its faculty, staff, students, or the Krause Fund may hold

a financial interest in the companies mentioned in this report.

Important disclosures appear on the last page of this report.

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center/interest-rates/Pages/Historic-LongTerm-Rate-

Data-Visualization.aspx

4. Trading Economics, US Unemployment Graph,

https://tradingeconomics.com/united-

states/unemployment-rate

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Production Index (INDPRO).

https://fred.stlouisfed.org/series/INDPRO

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https://fred.stlouisfed.org/series/GDPC1

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on Steel & Aluminum Import Tariffs. March 1st,

2018. Access via Bloomberg Terminal.

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Index by Commodity for Metals and Metal Products:

Hot Rolled Steel Sheet and Strip (WPU10170301).

https://fred.stlouisfed.org/series/WPU10170301

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_index

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industry/mining/surface-mining/surface-

technology/command.html

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https://tradingeconomics.com/united-states/housing-

starts

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e/library/integrated/index.html

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DotCom/releases/4Q17%20Caterpillar%20Inc.%20

Results.pdf

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https://www.caterpillar.com/en/company/brands.htm

l

24. Bloomberg Terminal, Command: PX1 <GO>

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FIN:4250 Course Pack, Estimating the WACC: U.S>

Historical Average Risk Premiums. Page 144

26. Bloomberg Terminal, Command: CAT Corp <GO>

Caterpillar, Inc.Income StatementAll numbers in millions unless noted

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2024E 2025E 2026ESales and Revenues:

Sales of machinery & energy & transportation $44,147 $35,773 $42,676  $     48,111   $     50,804   $     53,100   $     54,881   $     56,723   $     58,695   $     60,738   $     62,854   $     65,046   $     67,317 Revenues of financial products 2,864 2,764 2,786 2966 3094 3199 3308 3423 3543 3669 3800 3938 4081

Total sales & revenues 47,011 38,537 45,565 51226 53898 56299 58189 60146 62239 64407 66654 68984 71398

Operating Costs:Cost of goods sold 30,696 25,275 28,172 33197 35055 36639 37868 39139 40500 41909 43369 44882 46449Depreciation 2,709 2,708 2,554 2682 2816 2957 3104 3260 3423 3594 3773 3962 4160Amortization 337 326 323 322 316 305 287 278 262 244 223 198 186Selling, general & administrative expenses 5,199 4,686 5,177 5532 5821 6080 6284 6496 6722 6956 7199 7450 7711Research & development expenses 2,165 1,951 1,905 2049 2156 2252 2328 2406 2490 2576 2666 2759 2856Interest expense of financial products 587 596 646 489 464 441 419 398 378 359 341 324 308Investment & interest income (expense) 65 74 122 246 258 271 284 299 314 329 346 363 381Goodwill impairment charge 0 595 0 0 0 0 0 0 0 0 0 0 0Other operating expenses (income) 2,062 1,902 2,279 1800 1500 1200 1200 1200 1200 1200 1200 1200 1200

Total operating costs 43,755 38,039 41,056 46316 48386 50145 51775 53475 55287 57168 59118 61139 63251

Operating profit 3,256$ 498$ 4,406$ 4,910$        5,512$        6,154$        6,414$        6,671$        6,951$        7,239$        7,537$        7,845$        8,147$       

Interest expense excluding financial products 507 505 531 236 224 213 203 192 183 174 165 157 149Other income (expense) 106 146 207 200 200 200 200 200 200 200 200 200 200

Consolidated profit (loss) before taxes 2,855 139 4,082 4374 4988 5641 5912 6179 6468 6765 7072 7388 7698

Provision (credit) for income taxes 742 192 3,339 905 1032 1168 1224 1279 1339 1400 1464 1529 1593Profit (loss) of consolidated companies 2,113 -53 743 3469 3955 4473 4688 4900 5129 5365 5608 5859 6105Less: profit (loss) attributable to noncontrolling interests -11 -8 -5 0 0 0 0 0 0 0 0 0 0Profit (loss) 2,102 -67 754 $3,469 $3,955 $4,473 $4,688 $4,900 $5,129 $5,365 $5,608 $5,859 $6,105

Weighted average shares outstanding-basic 594 584 592 599 603 606 610 613 616 620 621 621 621Year end shares outstanding 582 586 598 601 604 608 611 615 618 621 621 621 621Net profit (loss) per share - basic 3.54$ (0.11)$ 1.27$ $5.77 $6.54 $7.36 $7.67 $7.97 $8.30 $8.63 $9.02 $9.43 $9.82

Cash dividends declared per common share 3.01 3.08 3.11 $3.28 $3.46 $3.65 $3.85 $4.06 $4.29 $4.52 $4.77 $5.04 $5.31

Caterpillar, Inc.Balance SheetAll numbers in millions unless noted

2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2024E 2025E 2026EAssetsCurrent Assets:

Cash & short-term investments 6,460$ 7,168$ 8,260$ 10,737 13,452 16,438 19,389 22,296 25,164 27,985 30,763 33,487 36,127

Receivables - trade & other receivables 6,695 5,981 7,436 7,245 7,059 6,878 6,701 6,529 6,362 6,198 6,039 5,884 5,733 Receivables - finance 8,991 8,522 8,757 8,760 8,763 8,766 8,769 8,771 8,774 8,777 8,780 8,783 8,786 Prepaid expenses & other current assets 1,046 1,682 1,772 1,945 2,136 2,345 2,574 2,826 3,102 3,406 3,739 4,105 4,506 Raw materials 2,467 2,102 2,802 2,746 2,692 2,638 2,586 2,535 2,484 2,435 2,387 2,339 2,293 Work-in-process 1,857 1,719 2,254 2,439 2,640 2,857 3,092 3,346 3,621 3,919 4,241 4,589 4,967 Finished goods 5,122 4,576 4,761 4,851 4,943 5,036 5,132 5,229 5,328 5,428 5,531 5,636 5,742 Supplies 254 217 201 193 184 177 169 162 155 149 142 136 131 Inventories 9,700 8,614 10,018 10,166 10,316 10,468 10,622 10,779 10,938 11,099 11,263 11,429 11,598

Total current assets 34,418 31,967 36,244 38,853 41,725 44,894 48,055 51,201 54,340 57,465 60,585 63,688 66,751

Property, plant & equipment, net 16,090 15,322 14,155 14,349 14,545 14,745 14,947 15,151 15,359 15,569 15,782 15,998 16,218 Long-term receivables - trade & other 1,170 1,029 990 947 906 866 828 792 758 725 693 663 634 Long-term receivables - finance 13,651 13,556 13,542 13,464 13,387 13,310 13,233 13,157 13,081 13,006 12,931 12,857 12,783 Investments in unconsolidated affiliated companies 246 0 0 - - - - - - - - - - Non-current deferred & refundable income taxes 1,654 2,790 1,693 1,571 1,459 1,354 1,257 1,166 1,083 1,005 933 866 804 Intangible assets 2,821 2,349 2,111 1,689 1,351 1,081 865 692 553 443 354 283 227 Goodwill 6,615 6,020 6,200 6,935 7,758 8,678 9,707 10,859 12,147 13,587 15,199 17,001 19,018 Other assets 1,832 1,671 2,027 2,066 2,106 2,147 2,189 2,231 2,275 2,319 2,364 2,410 2,457

Total Assets 78,497$ 74,704$ 76,962$ 79,875 83,237 87,074 91,081 95,249 99,594 104,118 108,840 113,766 118,889

LiabilitiesCurrent Liabilities:

Short-term borrowings - financial products 6,958 7,094 4,836 4,760 4,685 4,612 4,539 4,468 4,398 4,328 4,260 4,193 4,128 Accounts payable 5,023 4,614 6,487 6,704 6,927 7,159 7,398 7,645 7,900 8,164 8,436 8,718 9,009 Accrued expenses 3,116 3,003 3,220 3,133 3,048 2,966 2,886 2,808 2,732 2,658 2,586 2,516 2,448 Accrued wages, salaries & employee benefits 1,994 1,296 2,559 2,773 3,005 3,256 3,529 3,824 4,144 4,490 4,866 5,273 5,713 Customer advances 1,146 1,167 1,193 1,133 1,076 1,022 971 922 875 831 790 750 712 Dividends payable 448 452 466 499 534 571 611 654 700 749 802 858 919 Other current liabilities 1,730 1,635 1,975 2,124 2,284 2,456 2,641 2,840 3,054 3,284 3,532 3,798 4,084 Lg-tm debt due w/in 1 yr - machinery, energy & transportation 517 507 6 4 2 1 1 1 0 0 0 0 0 Lg-tm debt due within 1 yr - financial products 5,362 6,155 6,188 6,331 6,478 6,628 6,781 6,938 7,099 7,263 7,431 7,604 7,780

Total current liabilities 26,303 26,132 26,930 27,460 28,040 28,671 29,356 30,099 30,902 31,769 32,703 33,710 34,793

Long-term debt - machinery, energy & transportation 9,004 8,436 7,929 8,219 8,520 8,833 9,156 9,491 9,839 10,200 10,573 10,960 11,362 Medium-term notes 15,713 13,869

Other long-term debt - financial products 530 513

Long-term debt - financial products 16,243 14,382 15,918 15,792 15,667 15,543 15,420 15,298 15,177 15,057 14,938 14,819 14,702 Liability for postemployment benefits 8,843 9,357 8,365 8,203 8,044 7,888 7,736 7,586 7,439 7,295 7,153 7,015 6,879 Other liabilities 3,219 3,184 4,053 4,318 4,600 4,900 5,221 5,562 5,925 6,312 6,725 7,164 7,632

Total liabilities 63,612 61,491 63,195 63,992 64,871 65,835 66,888 68,036 69,282 70,632 72,092 73,668 75,368

Shareholders' equityRedeemable noncontrolling interest - - -

Common stock 5,238 5,277 5,593 5,593 5,593 5,593 5,593 5,593 5,593 5,593 5,593 5,593 5,593 Treasury stock, at cost -17,640 -17,478 -17,005 (16,385) (15,765) (15,145) (14,525) (13,905) (13,285) (12,665) (12,045) (11,425) (10,805) Profit employed in the business 34,208 27,377 26,301 27,798 29,661 31,914 34,247 36,649 39,128 41,681 44,323 47,053 49,856 Accumulated other comprehensive income (loss) (6,997) (2,039) (1,192) (1,192) (1,192) (1,192) (1,192) (1,192) (1,192) (1,192) (1,192) (1,192) (1,192) Non-controlling interests 76 76 69 69 69 69 69 69 69 69 69 69 69

Total stockholders' equity 14,885$ 13,213$ 13,766$ 15,883$ 18,366$ 21,239$ 24,192$ 27,214$ 30,313$ 33,486$ 36,748$ 40,098$ 43,521$ Total liabilites and stockholder equity 78,497$ 74,704$ 76,961$ 79,875$ 83,237$ 87,074$ 91,081$ 95,249$ 99,594$ 104,118$ 108,840$ 113,766$ 118,889$

Caterpillar, Inc.Cash Flow StatementAll numbers in millions unless notedFiscal Years Ending Dec. 31 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Cash flow from operating activities:Profit (loss) of consolidated & affiliated companies 3,557$ 827$ 2,758$ 4,981$ 5,722$ 3,803$ 3,711$ 2,113$ (59)$ 759$ Adjustments for non-cash items:

Depreciation & amortization 1,980 2,336 2,296 2,527 2,813 3,087 3,163 3,046 3,034 2,877Actuarial loss (gain) on pension & postretirement benefits - - - - - - - - 985 301Provision (benefit) for deferred income taxes - - - - - - - - -431 1,213Goodwill impairment charge - - - - 580 - - - 595 -Other adjustments for noncash items 383 137 469 457 439 550 549 508 856 746

Changes in assets and liabilities, net of acquisitions and divertitures:Receivables - trade & other -545 4,014 -2,320 -1,345 -173 835 163 764 829 -1,151Inventories -833 2,501 -2,667 -2,927 -1,149 2,658 101 2,274 1,109 -1,295Accounts payable - -2,034 2,570 1,555 -1,868 134 222 -1,165 -200 1,478Accrued expenses - -505 117 308 183 -108 -10 -199 -201 175Accrued wages, salaries & employee benefits - - 847 619 -490 -279 901 -389 -708 1,187Customer advances 286 -646 604 173 241 -301 -593 -501 -37 -69Other assets, net -470 235 358 -91 252 -49 -300 -220 224 -192Other liabilities, net -227 -522 -23 753 -679 -71 146 444 -388 -327

Net cash flows from operating activities 4,787 6,343 5,009 7,010 5,241 10,191 8,057 6,675 5,608 5,702

Cash flow from investing activities:Capital expenditures - excluding equipment leased to others -2,445 -1,348 -1,575 -2,515 -3,350 -2,522 -1,539 -1,388 -1,109 -898Expenditures for equipment leased to others -1,566 -968 -1,011 -1,409 -1,726 -1,924 -1,840 -1,873 -1,819 -1,438Proceeds from disposal of leased assets & property, plant & equipment - - - 1,354 1,117 844 904 760 899 1,164Additions to finance receivables -14,031 -7,107 -8,498 -10,001 -12,010 -11,422 -11,278 -9,929 -9,339 -11,953Collections of finance receivables 9,717 9,288 8,987 8,874 8,995 9,567 9,841 9,247 9,369 12,018Proceeds from sale of finance receivables 949 100 16 207 132 220 177 136 127 127Investments & acquisitions, net of cash acquired -117 -19 -1,126 -8,184 -618 -195 -30 -400 -191 -59Proceeds from sale of business & investments, net of cash sold - - - 376 1,199 365 199 178 - 100Proceeds from sale of securities 357 291 228 247 306 449 810 351 694 932Investments in securities -339 -349 -217 -336 -402 -402 -825 -485 -391 -1,048Other investing activities - net 197 -128 132 -40 167 -26 -46 -114 - 61

Net cash flows from investing activities -6,296 1,002 -1,595 -11,427 -6,190 -5,046 -3,627 -3,517 -1,760 -994

Cash flow from financing activities:Dividends paid -953 -1,029 -1,084 -1,159 -1,617 -1,111 -1,620 -1,757 -1,799 -1,831Common stock issued, including treasury shares reissued 135 89 296 123 52 128 239 33 -23 566Treasury shares repurchased -1,800 - - - - -2,000 -4,238 -2,025 - -Proceeds from debt issued (original maturities greater than three months):

Machinery, Energy & Transportation 1,673 458 216 4,587 2,209 195 1,994 3 6 361Financial Products 16,257 11,833 8,108 10,873 13,806 9,133 8,655 5,129 5,109 8,702

Payments on debt (origional maturities greater than three months):Machinery, Energy & Transportation -296 -918 -1,298 -2,269 -1,107 -1,769 -785 -517 -533 -1,465Financial Products -14,143 -11,769 -11,163 -8,324 -9,992 -9,101 -8,463 -7,775 -6,032 -6,919

Short-term borrowings, net (original maturities three months or less) 2,074 -3,884 291 -43 461 -69 1,043 3,022 140 -3,058Excess tax benefit from stock-based compensation 56 21 153 189 192 96 182 24 28 -Other financing activities - - - - - - - - - -9

Net cash flows from financing activities 2,965 -5,215 -4,613 3,966 3,549 -4,511 -2,996 -3,870 -3,112 -3,653Effect of exchange rate changes on cash 158 1 -76 -84 -167 -43 -174 -169 -28 38Increase (decrease) in cash & short-term investments 1,614 2,131 -1,275 -535 2,433 591 1,260 -881 708 1,093Cash & short-term investments at beginning of period 1,122 2,736 4,867 3,592 3,057 5,490 6,081 7,341 6,460 7,168Cash & short-term investments at end of period 2,736$ 4,867$ 3,592$ 3,057$ 5,490$ 6,081$ 7,341$ 6,460$ 7,168$ 8,261$

Caterpillar, Inc.Cash Flow StatementAll numbers in millions unless noted Fiscal Years Ending Dec. 31   2018E   2019E   2020E   2021E   2022E   2023E   2024E   2024E   2025E   2026E Cash flow from Operating activities:

Net Income 3,469 3,955 4,473 4,688 4,900 5,129 5,365 5,608 5,859 6,105 Depreciation and ammortization 3,004 3,132 3,262 3,391 3,538 3,685 3,838 3,996 4,160 4,346 Receivables - trade & other receivables 191 186 181 177 172 168 163 159 155 151 Receivables - finance (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) Prepaid expenses & other current assets (173) (190) (209) (229) (252) (276) (303) (333) (366) (402) Inventories (148) (150) (152) (154) (157) (159) (161) (164) (166) (169) Short-term borrowings - financial products (76) (75) (74) (72) (71) (70) (69) (68) (67) (66) Accounts payable 217 224 231 239 247 255 264 273 282 291 Accrued expenses (87) (85) (82) (80) (78) (76) (74) (72) (70) (68) Accrued wages, salaries & employee benefits 214 232 251 272 295 320 347 376 407 441 Customer advances (60) (57) (54) (51) (49) (46) (44) (42) (40) (38) Dividends payable 33 35 37 40 43 46 49 53 56 60 Other current liabilities 149 160 172 185 199 214 230 248 266 286 Lg-tm debt due w/in 1 yr - machinery, energy & transportation (2) (1) (1) (1) (0) (0) (0) (0) (0) (0) Lg-tm debt due within 1 yr - financial products 143 147 150 153 157 161 164 168 172 176

Net Cash flow from operating 6,869 7,509 8,183 8,555 8,941 9,346 9,765 10,198 10,646 11,112

Cash flow from Investing activities:Property, plant & equipment, net (2,876) (3,012) (3,156) (3,306) (3,464) (3,630) (3,804) (3,987) (4,178) (4,379) Long-term receivables - trade & other 43 41 40 38 36 35 33 32 30 29 Long-term receivables - finance 78 77 77 77 76 76 75 75 74 74 Investments in unconsolidated affiliated companies - - - - - - - - - - Non-current deferred & refundable income taxes 122 113 105 97 90 84 78 72 67 62 Intangible assets 100 22 (35) (71) (105) (124) (133) (134) (127) (129) Goodwill (735) (823) (920) (1,029) (1,151) (1,288) (1,441) (1,612) (1,803) (2,016) Other assets (39) (40) (41) (42) (42) (43) (44) (45) (46) (47) Net cash flow from investing (3,307) (3,622) (3,930) (4,237) (4,561) (4,891) (5,236) (5,599) (5,982) (6,407)

Cash flow from Financing activities:

Long-term debt - machinery, energy & transportation 290 301 312 324 335 348 360 374 387 401 Commercial paper - - - - - - - - - - Medium-term notes - - - - - - - - - - Other long-term debt - financial products - - - - - - - - - - Long-term debt - financial products (126) (125) (124) (123) (122) (121) (120) (119) (118) (117) Liability for postemployment benefits (162) (159) (156) (153) (150) (147) (144) (141) (139) (136) Other liabilities 265 282 301 320 341 363 387 412 439 468 Common stock - - - - - - - - - - Treasury stock, at cost 620 620 620 620 620 620 620 620 620 620 Accumulated other comprehensive income (loss) - - - - - - - - - - Non-controlling interests - - - - - - - - - - Dividend (1,972) (2,092) (2,220) (2,355) (2,498) (2,650) (2,811) (2,966) (3,129) (3,301) Net Cash provided by financing activities (1,085) (1,173) (1,267) (1,367) (1,474) (1,587) (1,708) (1,820) (1,939) (2,065)

Net Increase (Decrease) in Cash 2,477 2,715 2,986 2,951 2,906 2,868 2,821 2,779 2,724 2,640 Cash, Beginning of year 8,260 10,737 13,452 16,438 19,389 22,296 25,164 27,985 30,763 33,487 Cash, End of year 10,737 13,452 16,438 19,389 22,296 25,164 27,985 30,763 33,487 36,127

Caterpillar, Inc.Common Size Income Statement

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2024E 2025E 2026ESales and Revenues:

Sales of machinery & energy & transportation 93.91% 92.83% 93.66% 93.92% 94.26% 94.32% 94.31% 94.31% 94.31% 94.30% 94.30% 94.29% 94.28%Revenues of financial products 6.09% 7.17% 6.11% 5.79% 5.74% 5.68% 5.69% 5.69% 5.69% 5.70% 5.70% 5.71% 5.72%

Total sales & revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Operating Costs:Cost of goods sold 71.77% 73.46% 68.14% 69.00% 69.00% 69.00% 69.00% 69.00% 69.00% 69.00% 69.00% 69.00% 69.00%Selling, general & administrative expenses 11.06% 12.16% 11.36% 10.80% 10.80% 10.80% 10.80% 10.80% 10.80% 10.80% 10.80% 10.80% 10.80%Research & development expenses 4.61% 5.06% 4.18% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%Interest expense of financial products 1.25% 1.55% 1.42% 0.95% 0.86% 0.78% 0.72% 0.66% 0.61% 0.56% 0.51% 0.47% 0.43%Goodwill impairment charge 0.00% 1.54% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other operating expenses (income) 4.39% 4.94% 5.00% 3.51% 2.78% 2.13% 2.06% 2.00% 1.93% 1.86% 1.80% 1.74% 1.68%

Total operating costs 93.07% 98.71% 90.10% 90.41% 89.77% 89.07% 88.98% 88.91% 88.83% 88.76% 88.69% 88.63% 88.59%

Operating profit 6.93% 1.29% 9.67% 9.59% 10.23% 10.93% 11.02% 11.09% 11.17% 11.24% 11.31% 11.37% 11.41%

Interest expense excluding financial products 1.08% 1.31% 1.17% 0.46% 0.42% 0.38% 0.35% 0.32% 0.29% 0.27% 0.25% 0.23% 0.21%Investment & interest income 0.14% 0.19% 0.27% 0.48% 0.48% 0.48% 0.49% 0.50% 0.50% 0.51% 0.52% 0.53% 0.53%Foreign exchange gains (losses) -0.48% -0.15% -0.47% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%License fee income 0.24% 0.24% 0.22% 0.20% 0.19% 0.18% 0.17% 0.17% 0.16% 0.16% 0.15% 0.14% 0.14%Gains (losses) on sale of securities & affiliated companies 0.37% 0.12% 0.41% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Impairment of available-for-sale securities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Miscellaneous income (loss) -0.04% -0.03% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other income (expense) 0.23% 0.38% 0.45% 0.39% 0.37% 0.36% 0.34% 0.33% 0.32% 0.31% 0.30% 0.29% 0.28%Profit (loss) before taxes - U.S. 0.51% -5.33% 0.53% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Profit (loss) before taxes - Non-U.S. 5.56% 5.69% 8.43% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Consolidated profit (loss) before taxes 6.07% 0.36% 8.96% 8.54% 9.25% 10.02% 10.16% 10.27% 10.39% 10.50% 10.61% 10.71% 10.78%

Total current tax provision (credit) 2.60% 1.62% 4.67% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total deferred tax provision (credit) -1.02% -1.12% 2.66% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Provision (credit) for income taxes 1.58% 0.50% 7.33% 1.77% 1.92% 2.07% 2.10% 2.13% 2.15% 2.17% 2.20% 2.22% 2.23%Profit (loss) of consolidated companies 4.49% -0.14% 1.63% 6.77% 7.34% 7.95% 8.06% 8.15% 8.24% 8.33% 8.41% 8.49% 8.55%Equity in profit (loss) of unconsolidated affiliated companies 0.00% -0.02% 0.04% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Profit (loss) of consolidated & affiliated companies 4.49% -0.15% 1.67% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Less: profit (loss) attributable to noncontrolling interests -0.02% -0.02% -0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Profit (loss) 4.47% -0.17% 1.65% 6.77% 7.34% 7.95% 8.06% 8.15% 8.24% 8.33% 8.41% 8.49% 8.55%

Caterpillar, Inc.Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2024E 2025E 2026ECash & short-term investments 13.74% 18.60% 18.13% 20.96% 24.96% 29.20% 33.32% 37.07% 40.43% 43.45% 46.15% 48.54% 50.60%Receivables - trade & other receivables 14.24% 15.52% 16.32% 14.14% 13.10% 12.22% 11.52% 10.86% 10.22% 9.62% 9.06% 8.53% 8.03%Receivables - finance 19.13% 22.11% 19.22% 17.10% 16.26% 15.57% 15.07% 14.58% 14.10% 13.63% 13.17% 12.73% 12.31%Deferred & refundable income taxes 3.25% 5.08% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Prepaid expenses & other current assets 2.23% 4.36% 3.89% 3.80% 3.96% 4.16% 4.42% 4.70% 4.98% 5.29% 5.61% 5.95% 6.31%Raw materials 5.25% 5.45% 6.15% 5.36% 4.99% 4.69% 4.44% 4.21% 3.99% 3.78% 3.58% 3.39% 3.21%Work-in-process 3.95% 4.46% 4.95% 4.76% 4.90% 5.07% 5.31% 5.56% 5.82% 6.08% 6.36% 6.65% 6.96%Finished goods 10.90% 11.87% 10.45% 9.47% 9.17% 8.95% 8.82% 8.69% 8.56% 8.43% 8.30% 8.17% 8.04%Supplies 0.54% 0.56% 0.44% 0.38% 0.34% 0.31% 0.29% 0.27% 0.25% 0.23% 0.21% 0.20% 0.18%Inventories 20.63% 22.35% 21.99% 19.84% 19.14% 18.59% 18.25% 17.92% 17.57% 17.23% 16.90% 16.57% 16.24%

Total current assets 73.21% 82.95% 79.54% 75.85% 77.42% 79.74% 82.58% 85.13% 87.31% 89.22% 90.89% 92.32% 93.49%

Property, plant & equipment, net 34.23% 39.76% 31.07% 28.01% 26.99% 26.19% 25.69% 25.19% 24.68% 24.17% 23.68% 23.19% 22.71%Long-term receivables - trade & other 2.49% 2.67% 2.17% 1.85% 1.68% 1.54% 1.42% 1.32% 1.22% 1.12% 1.04% 0.96% 0.89%Long-term receivables - finance 29.04% 35.18% 29.72% 26.28% 24.84% 23.64% 22.74% 21.87% 21.02% 20.19% 19.40% 18.64% 17.90%Investments in unconsolidated affiliated companies 0.52% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Non-current deferred & refundable income taxes 3.52% 7.24% 3.72% 3.07% 2.71% 2.40% 2.16% 1.94% 1.74% 1.56% 1.40% 1.25% 1.13%Intangible assets 6.00% 6.10% 4.63% 3.30% 2.51% 1.92% 1.49% 1.15% 0.89% 0.69% 0.53% 0.41% 0.32%Goodwill 14.07% 15.62% 13.61% 13.54% 14.39% 15.41% 16.68% 18.05% 19.52% 21.10% 22.80% 24.65% 26.64%Other assets 3.90% 4.34% 4.45% 4.03% 3.91% 3.81% 3.76% 3.71% 3.65% 3.60% 3.55% 3.49% 3.44%

Total assets 166.98% 193.85% 168.91% 155.93% 154.43% 154.66% 156.52% 158.36% 160.02% 161.66% 163.29% 164.92% 166.52%

LiabilitiesCurrent Liabilities:

Short-term borrowings - machinery & energy & transportation 0.02% 0.54% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Short-term borrowings - financial products 14.80% 18.41% 10.61% 9.29% 8.69% 8.19% 7.80% 7.43% 7.07% 6.72% 6.39% 6.08% 5.78%Accounts payable 10.68% 11.97% 14.24% 13.09% 12.85% 12.72% 12.71% 12.71% 12.69% 12.68% 12.66% 12.64% 12.62%Accrued expenses 6.63% 7.79% 7.07% 6.12% 5.66% 5.27% 4.96% 4.67% 4.39% 4.13% 3.88% 3.65% 3.43%Accrued wages, salaries & employee benefits 4.24% 3.36% 5.62% 5.41% 5.58% 5.78% 6.06% 6.36% 6.66% 6.97% 7.30% 7.64% 8.00%Customer advances 2.44% 3.03% 2.62% 2.21% 2.00% 1.82% 1.67% 1.53% 1.41% 1.29% 1.18% 1.09% 1.00%Dividends payable 0.95% 1.17% 1.02% 0.97% 0.99% 1.01% 1.05% 1.09% 1.13% 1.16% 1.20% 1.24% 1.29%Other current liabilities 3.68% 4.24% 4.33% 4.15% 4.24% 4.36% 4.54% 4.72% 4.91% 5.10% 5.30% 5.51% 5.72%Lg-tm debt due w/in 1 yr - machinery, energy & transportation 1.10% 1.32% 0.01% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Lg-tm debt due within 1 yr - financial products 11.41% 15.97% 13.58% 12.36% 12.02% 11.77% 11.65% 11.54% 11.41% 11.28% 11.15% 11.02% 10.90%

Total current liabilities 55.95% 67.81% 59.10% 53.61% 52.02% 50.93% 50.45% 50.04% 49.65% 49.32% 49.06% 48.87% 48.73%

Long-term debt - machinery, energy & transportation 19.15% 21.89% 17.40% 16.05% 15.81% 15.69% 15.74% 15.78% 15.81% 15.84% 15.86% 15.89% 15.91%Long-term debt - financial products 34.55% 37.32% 34.93% 30.83% 29.07% 27.61% 26.50% 25.43% 24.39% 23.38% 22.41% 21.48% 20.59%Liability for postemployment benefits 18.81% 24.28% 18.36% 16.01% 14.92% 14.01% 13.29% 12.61% 11.95% 11.33% 10.73% 10.17% 9.63%Other liabilities 6.85% 8.26% 8.89% 8.43% 8.53% 8.70% 8.97% 9.25% 9.52% 9.80% 10.09% 10.38% 10.69%

Total liabilities 135.31% 159.56% 138.69% 124.92% 120.36% 116.94% 114.95% 113.12% 111.32% 109.66% 108.16% 106.79% 105.56%

Shareholders' equityCommon stock 11.14% 13.69% 12.27% 10.92% 10.38% 9.93% 9.61% 9.30% 8.99% 8.68% 8.39% 8.11% 7.83%Treasury stock, at cost -37.52% -45.35% -37.32% -31.99% -29.25% -26.90% -24.96% -23.12% -21.35% -19.66% -18.07% -16.56% -15.13%Profit employed in the business 72.77% 71.04% 57.72% 54.26% 55.03% 56.69% 58.85% 60.93% 62.87% 64.72% 66.50% 68.21% 69.83%Accumulated other comprehensive income (loss) -14.88% -5.29% -2.62% -2.33% -2.21% -2.12% -2.05% -1.98% -1.92% -1.85% -1.79% -1.73% -1.67%Non-controlling interests 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total stockholders' equity 31.66% 34.29% 30.21% 31.00% 34.07% 37.73% 41.58% 45.25% 48.70% 51.99% 55.13% 58.13% 60.96%

Caterpillar, Inc. Marginal Tax Rate(2018‐) 20.70%Value Driver Estimation WACC 7%

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2024E 2025E 2026EEBITA:Operating Revenues 47011 38537 45565 51226 53898 56299 58189 60146 62239 64407 66654 68984 71398Cost of Goods Sold (COGS) 33742 28309 31049 33197 35055 36639 37868 39139 40500 41909 43369 44882 46449SG&A 5199 4686 5177 5532 5821 6080 6284 6496 6722 6956 7199 7450 7711R&D Expense 2165 1951 1905 2049 2156 2252 2328 2406 2490 2576 2666 2759 2856Depreciation and Amortization 3046 3034 2877 3004 3132 3262 3391 3538 3685 3838 3996 4160 4346Implied Interest on Operating Leases 87 74 70 75 79 79 81 80 78 77 77 78 79EBITA 2772 483 4487 7370 7656 7987 8237 8488 8765 9051 9346 9654 9958

Less Adjusted Taxes:Provision for Income Taxes 742 192 3339 905 1032 1168 1224 1279 1339 1400 1464 1529 1593+Tax Shield on Implied Lease Interest 87 74 70 75 79 79 81 80 78 77 77 78 79+Tax Shield on Interest Expense of FP 169 172 186 101 96 91 87 82 78 74 71 67 64+Tax Shield on Goodwill Impairment 0 171 0 0 0 0 0 0 0 0 0 0 0‐Tax on Interest/Investment Income 19 21 35 51 53 56 59 62 65 68 72 75 79+Tax Shield on Interest Expense of Non FP 146 145 153 49 46 44 42 40 38 36 34 32 31+Tax Shield on Other Expense 31 42 60 41 41 41 41 41 41 41 41 41 41Adjusted Taxes 1156 775 3773 1121 1242 1368 1416 1460 1509 1561 1616 1673 1729

Plus Change in Net Deffered Tax LiabilitiesDTLt ‐ DTAt ‐3180 ‐4747 ‐1693 ‐1777 ‐1847 ‐1912 ‐1964 ‐2013 ‐2059 ‐2106 ‐2151 ‐2196 ‐2237‐ DTLt‐1 ‐ DTAt‐1 ‐3143 ‐3180 ‐4747 ‐1693 ‐1777 ‐1847 ‐1912 ‐1964 ‐2013 ‐2059 ‐2106 ‐2151 ‐2196Change in Defered Taxes ‐37 ‐1567 3054 ‐84 ‐70 ‐65 ‐52 ‐50 ‐46 ‐47 ‐46 ‐45 ‐41

NOPLAT 1580 ‐1859 3768 6164 6345 6554 6769 6978 7210 7443 7685 7937 8187

Operating Current Assets:Normal Cash 328 364 207 268 336 411 485 557 629 700 769 837 903Accounts receivable 15,686 14,503 16,193 16,847 17,416 17,929 18,462 18,973 19,503 20,053 20,602 21,148 21,669Inventory 9,700 8,614 10,018 10,518 10,929 11,312 11,621 11,914 12,184 12,460 12,731 12,995 13,238PPD Expenses 1,046 1,682 1,772 1,860 1,933 2,001 2,055 2,107 2,155 2,204 2,252 2,299 2,342Operating Current Assets 26,760 25,163 28,190 29,493 30,615 31,653 32,623 33,551 34,471 35,417 36,354 37,279 38,152

Operating current liabilities:Accounts Payable 5,023 4,614 6,487 7,293 7,673 8,015 8,284 8,563 8,861 9,170 9,489 9,821 10,165Accrued Expenses  5,110 4,299 3,220 3,620 3,809 3,979 4,112 4,250 4,398 4,552 4,710 4,875 5,046Deferred revenue  1,146 1,167 1,193 1,341 1,411 1,474 1,524 1,575 1,630 1,686 1,745 1,806 1,869Operating Current Liabilites  11,279 10,080 10,900 12,254 12,893 13,468 13,920 14,388 14,889 15,407 15,945 16,502 17,080

Net Operating Working Capital 15481 15083 17290 17239 17722 18185 18703 19163 19582 20010 20409 20776 21072Plus: Net Property Plant & Equipment  16,090 15,322 14,155 14,721 15,310 15,922 16,559 17,222 17,911 18,627 19,372 20,147 20,953Plus: PV Operating Leases 839 722 688 655 624 594 566 539 514 489 466 444 423Plus: Receivables‐ Finance/Trade & Other 14821 14585 14532 15257 15854 16409 16857 17282 17674 18075 18467 18850 19203Plus: Net Intangible Assets 2821 2349 2111 2216 2303 2384 2449 2511 2567 2626 2683 2738 2790Plus: Other Assets Net 1,832 1,671 2,027 2,128 2,211 2,289 2,351 2,411 2,465 2,521 2,576 2,629 2,679Less: Other Operating Liabilities  8,843 9,357 8,365 9,404 9,895 10,336 10,683 11,042 11,426 11,824 12,237 12,664 13,108Invested Capital:  43,041 40,375 42,437 42,812 44,130 45,448 46,802 48,086 49,287 50,524 51,736 52,920 54,011

ROIC 6.04% ‐4.32% 9.33% 14.53% 14.82% 14.85% 14.89% 14.91% 14.99% 15.10% 15.21% 15.34% 15.47%FCF ‐$15,295 $807 $1,706 $5,789 $5,027 $5,236 $5,415 $5,695 $6,009 $6,206 $6,473 $6,752 $7,096EP ‐$359 ‐$5,048 $777 $3,020 $3,173 $3,284 $3,401 $3,511 $3,648 $3,791 $3,941 $4,103 $4,266

Caterpillar, Inc.Weighted Average Cost of Capital (WACC) Estimation

Cost of EquityRisk‐free Rate 2.97%Market Risk Premium 4.80%Beta 1.295Cost of Equity 9.19%

Cost of DebtPre‐tax cost of debt 3.75%Tax rate 20.7%Cost of Debt 2.98%

Cost of Preferred 0.00%

Market Value of EquityShare Price $150.23Shares Outstanding 597.63Market Value of Equity $89,781

Market Value of DebtST and Current Portion of LT $11,031Long Term $24,350PV of Oper. Leases 688Market Value of Debt $36,069

Market Weights% Equity 71.34%% Debt 28.66%

100.00%

WACC 7.41%

Caterpillar, Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:     CV Growth 3.75%     CV ROIC 15.00%     WACC 7.41%     Cost of Equity 9.19%

Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E

DCF ModelPeriod 1 2 3 4 5 6 7 8 9 10 Model Date 4/12/2018NOPLAT 6164 6345 6554 6769 6978 7210 7443 7685 7937 8187 Next FYE 12/31/2018CapEx 375 1317 1319 1354 1283 1201 1237 1212 1185 1091 Last FYE 12/31/2017Free Cash Flow (FCF) 5789 5027 5236 5415 5695 6009 6206 6473 6752 7096 Days in FY 365                Continuing Value       167,809  Days to FYE 102                

Elapsed Fraction 0.279Discount Period 1 2 3 4 5 6 7 8 9 9 Adjusted Stock Price 164.05          PV of FCF 5390 4358 4225 4068 3984 3913 3763 3654 3549 88194

Value of Oper. Assets 125,097           +Value of Non‐Oper. Assets 10495‐Value of Debt 36069‐Value of Other 9,753

Value of Equity 89,770              Shares Outstanding 598Intrinsic Value 150.21              

EP ModelPeriod 1 2 3 4 5 6 7 8 9 10NOPLAT 6164 6345 6554 6769 6978 7210 7443 7685 7937 8187Beg Invested Capital 42,437 42,812 44,130 45,448 46,802 48,086 49,287 50,524 51,736 52,920ROIC 14.53% 14.82% 14.85% 14.89% 14.91% 14.99% 15.10% 15.21% 15.34% 15.47%WACC 7.41% 7.41% 7.41% 7.41% 7.41% 7.41% 7.41% 7.41% 7.41% 7.41%Economic Profit (EP) 3020 3173 3284 3401 3511 3648 3791 3941 4103 4266Continuing Value 114889

Discount Period 1 2 3 4 5 6 7 8 9 9PV of Economic Profit 2811 2750 2650 2556 2456 2375 2298 2225 2157 60381

Value of EP 82660+Beg. Invested Capital 42437Value of Operating Assets 125097+Value of Non‐Oper. Assets 10495‐Value of Debt 36069‐Value of Other 9,753

Value of Equity 89,770              Shares Outstanding 598Intrinsic Value 150.21              

Caterpillar, Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending  2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E

EPS 5.77$           6.54$       7.36$       7.67$       7.97$       8.30$       8.63$       9.02$       9.43$       9.82$         EPS Growth 13.39% 12.46% 4.23% 3.94% 4.11% 4.02% 4.53% 4.48% 4.19%

Key Assumptions   CV growth 3.75%   CV ROE 15.00%   Cost of Equity 9.19%

Future Cash Flows

P/E Multiple (CV Year) 13.79EPS (CV Year) 9.82$         Dividends Per Share 3.28 3.46 3.65 3.85 4.06 4.29 4.52 4.77 5.04 5.31Discount Periods 1 2 3 4 5 6 7 8 9 9Future Stock Price 135.43$    

Discounted Cash Flows 3.00 2.90 2.81 2.71 2.62 2.53 2.44 2.36 2.28 61.39

Intrinsic Value 85.05$       Current Day Adjustment 92.88$       

Model Date 4/12/2018Next FYE 12/31/2018Last FYE 12/31/2017Days in FY 365             Days to FYE 102             Elapsed Fraction 0.279

Caterpillar, Inc.Relative Valuation Models

EPS EPS Est. 5yrTicker Company Price Market Cap Enterprise Value 2018E 2019E P/E 18 P/E 19 EPS gr. PEG 18 PEG 19VOLV‐B AB Volvo 155.25$   315,445$        405,450$                2.49$       2.39$       12.00 12.60 9% 137.93     144.83    GE General Electric 13.48$     117,054$        234,810$                 $      0.96   $      1.06  14.04 12.72 10% 135.02     122.28    DE John Deere & Co. 155.32$   50,291$           87,190$                    $      9.46   $    11.43  16.42 13.59 26% 62.83       52.00      KMTUY Komatsu Ltd. 33.69$     32,100$           38,330$                    $      2.25   $      1.49  15.00 22.60 32% 47.32       71.29      CMI Cummins, Inc. 162.09$   26,676$           26,470$                    $    12.64   $    13.41  12.82 12.09 11% 119.96     113.07    CNHI CNH Industrial N.V. 12.40$     16,909$           37,800$                    $      0.67   $      0.82  18.51 15.12 30% 62.74       51.26      GNRC Generac Power Systems 45.91$     2,861$             3,710$                      $      3.60   $      3.75  12.75 12.24 8% 159.41     153.03    

Average 14.51       14.42       103.60    101.11   

CAT Caterpillar, Inc. $150.23 $88,078 $121,000 $5.77  $6.54  26.0         23.0         5.5% 473.3       417.4      

Implied Relative Value:   P/E (EPS18)  $    83.72    P/E (EPS19) 94.38$       PEG (EPS18) 32.88$       PEG (EPS19) 36.39$    

Caterpillar, Inc.Key Management Ratios

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2024E 2025E 2026E

Liquidity RatiosCash Ratio (Cash & Cash Equivalents/Current Liabilities) 0.25 0.27 0.31 0.39 0.48 0.57 0.66 0.74 0.81 0.88 0.94 0.99 1.04Current Ratio (Current Assets/Current Liabilities) 1.31 1.22 1.35 1.41 1.49 1.57 1.64 1.70 1.76 1.81 1.85 1.89 1.92Quick Ratio (Current Assets ‐ Inventories)/Current Liabilities) 0.84 0.83 0.91 0.97 1.04 1.12 1.19 1.25 1.30 1.35 1.39 1.43 1.46

Activity or Asset‐Management RatiosTotal Asset Turnover Ratio (Total Revenue/Average Total Assets) 1.17 1.01 1.15 1.25 1.26 1.26 1.25 1.23 1.22 1.21 1.20 1.19 1.18Inventory Turnover Ratio (COGS/Average Inventory) 2.80 2.76 3.02 3.29 3.42 3.53 3.59 3.66 3.73 3.80 3.88 3.96 4.03Receivable Turnover (Total Revenue/ Accounts Receivable) 2.80 2.46 3.14 3.16 3.37 3.56 3.72 3.89 4.07 4.26 4.45 4.65 4.87

Financial Leverage RatiosDebt to Equity Ratio (Total Debt/Total Shareholders Equity) 364.98 385.65 368.99 221.04 192.49 167.69 148.38 133.01 120.45 110.04 101.24 93.71 87.25Debt Ratio (Total Debt/Total Assets) 69.21 68.21 66.00 43.95 42.47 40.90 39.41 38.00 36.66 35.39 34.18 33.03 31.94Long Term Debt to Equity Ratio (LT Debt/ Total Shareholders Equity) 278.74 281.54 288.86 151.18 131.70 114.77 101.59 91.09 82.53 75.42 69.42 64.29 59.89

Profitability RatiosReturn or Assets (Net income/ Total Assets) 2.58% ‐0.09% 0.99% 4.42% 4.85% 5.25% 5.26% 5.26% 5.27% 5.27% 5.27% 5.26% 5.25%Gross Margin (COGS/Totale Revenue) 30.47% 29.35% 33.99% 31.00% 31.00% 31.00% 31.00% 31.00% 31.00% 31.00% 31.00% 31.00% 31.00%Operating Margin (Operating Income/Total Revenue) 6.93% 1.29% 9.67% 9.59% 10.23% 10.93% 11.02% 11.09% 11.17% 11.24% 11.31% 11.37% 11.41%

Payout Policy RatiosDividend Payout Ratio (Dividends per Share/EPS) 85.03% ‐2800.00% 244.88% 56.85% 52.90% 49.62% 50.23% 50.99% 51.67% 52.40% 52.89% 53.41% 54.08%Retention Ratio (EPS/Dividends per Share) 14.97% 2900.00% ‐144.88% 43.15% 47.10% 50.38% 49.77% 49.01% 48.33% 47.60% 47.11% 46.59% 45.92%

Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)

Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending  Leases2018 211 2017 211 2016 2372019 142 2018 160 2017 1832020 104 2019 107 2018 1402021 74 2020 81 2019 932022 58 2021 61 2020 68Thereafter 169 Thereafter 176 Thereafter 205Total Minimum Payments 758 Total Minimum Payments 796 Total Minimum Payments 926Less: Interest 70 Less: Interest 74 Less: Interest 87PV of Minimum Payments 688 PV of Minimum Payments 722 PV of Minimum Payments 839

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 2.98% Pre‐Tax Cost of Debt 2.98% Pre‐Tax Cost of Debt 2.98%Number Years Implied by Year 6 Payment 2.9 Number Years Implied by Year 6 Payment 2.9 Number Years Implied by Year 6 Payment 3.0

Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 211 204.9 1 211 204.9 1 237 230.12 142 133.9 2 160 150.9 2 183 172.63 104 95.2 3 107 98.0 3 140 128.24 74 65.8 4 81 72.0 4 93 82.75 58 50.1 5 61 52.7 5 68 58.76 & beyond 58 137.8 6 & beyond 61 143.6 6 & beyond 68 167.0PV of Minimum Payments 687.8 PV of Minimum Payments 722.1 PV of Minimum Payments 839.3

Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)

Operating Operating OperatingFiscal Years Ending  Leases Fiscal Years Ending 152.544828637025 Leases Fiscal Years Ending 166.058897319016 Leases2015 229 2014 244 2013 2542016 174 2015 180 2014 1932017 125 2016 133 2015 1392018 92 2017 99 2016 1042019 65 2018 74 2017 74Thereafter 189 Thereafter 229 Thereafter 239Total Minimum Payments 874 Total Minimum Payments 959 Total Minimum Payments 1003Less: Interest 81 Less: Interest 92 Less: Interest 97PV of Minimum Payments 793 PV of Minimum Payments 867 PV of Minimum Payments 906

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 2.98% Pre‐Tax Cost of Debt 2.98% Pre‐Tax Cost of Debt 2.98%Number Years Implied by Year 6 Payment 2.9 Number Years Implied by Year 6 Payment 3.1 Number Years Implied by Year 6 Payment 3.2

Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 229 222.4 1 244 236.9 1 254 246.72 174 164.1 2 180 169.7 2 193 182.03 125 114.5 3 133 121.8 3 139 127.34 92 81.8 4 99 88.0 4 104 92.55 65 56.1 5 74 63.9 5 74 63.96 & beyond 65 154.2 6 & beyond 74 186.3 6 & beyond 74 194.0PV of Minimum Payments 793.1 PV of Minimum Payments 866.7 PV of Minimum Payments 906.4

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol CATCurrent Stock Price $150.23Risk Free Rate 2.97%Current Dividend Yield 2.06%Annualized St. Dev. of Stock Returns 23.03%

Average Average B‐S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price Granted$22.17 ‐ 57.85 1,562,670 50.47 1.96 96.67$         151,070,997$     $73.20 ‐ 74.77 3,577,767 74.74 8.02 71.64$         256,307,378$     $83.00 5,266,798 83.00 7.17 66.61$         350,826,020$     $89.75 ‐ 96.31 7,912,539 94.17 6.88 59.79$         473,055,928$     $102.13 ‐ 110.09 3,180,121 106.55 3.74 49.33$         156,880,867$     Total 21,499,895 86.86$         6.32 80.77$         1,388,141,190$  

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares):  21,499,895Average Time to Maturity (years): 6.32Expected Annual Number of Options Exercised: 3,402,582

Current Average Strike Price: 86.86$            Cost of Equity: 9.00%Current Stock Price: $150.23

2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027EIncrease in Shares Outstanding: 3,402,582 3,402,582 3,402,582 3,402,582 3,402,582 3,402,582 3,402,582Average Strike Price: 86.86$             86.86$             86.86$             86.86$             86.86$             86.86$             86.86$             86.86$             86.86$             86.86$            Increase in Common Stock Account: 295,532,337   295,532,337   295,532,337   295,532,337   295,532,337   295,532,337   295,532,337   ‐                   ‐                   ‐                  

Change in Treasury Stock 510,150 494,846 480,000 465,600 451,632 438,083 424,941 412,192 399,827 387,832Expected Price of Repurchased Shares: 150.23$           163.75$           178.49$           194.55$           212.06$           231.15$           251.95$           274.63$           299.34$           326.28$          Number of Shares Repurchased: 3,396               3,022               2,689               2,393               2,130               1,895               1,687               1,501               1,336               1,189              

Shares Outstanding (beginning of the year) 597,626,000 601,025,186 604,424,746 607,824,639 611,224,828 614,625,280 618,025,967 621,426,862 621,425,361 621,424,026Plus: Shares Issued Through ESOP 3,402,582 3,402,582 3,402,582 3,402,582 3,402,582 3,402,582 3,402,582 0 0 0Less: Shares Repurchased in Treasury 3,396               3,022               2,689               2,393               2,130               1,895               1,687               1,501               1,336               1,189              Shares Outstanding (end of the year) 601,025,186 604,424,746 607,824,639 611,224,828 614,625,280 618,025,967 621,426,862 621,425,361 621,424,026 621,422,837