Financial Analysis
Financial Analysis
Company overview
Caterpillar Inc is an American corporation that manufactures, designs, markets, and sells engines and machines. The company also sells insurance and financial products to customers through a worldwide dealer network. Caterpillar is the largest manufactures in the world in the manufacturer of mining and construction equipment, natural gas engines, and diesel. Caterpillar Inc is based in Peoria, Illinois and was founded in 1925. Caterpillar usually markets its product directly and also through the many dealers, distributors, and the distribution channels that it has (Weygandt, et al 2010). Formerly the company was referred to as Caterpillar Tractor Co. and then it changed its name to Caterpillar Inc.
The company’s components and products are manufactured in 110 facilities around the world. There are fifty one plants that are located in the United States and also fifty nine plants overseas. The historical manufacturing home for the company is in Peoria, and it is also the location where the company’s headquarters are and also the main research and development activities. The company has contracted many of its local parts warehousing and production to the third parties. However, it still has 4 major plants that are located in Peoria area. One of the areas is the Mapleton Foundry, which is the area where diesel engine blocks are casts. The second area is the East Peoria factory that has assembled the caterpillar tractors for more than seventy years. The third area is the Morton parts facility and finally Mossville engine plant.
The products that are produced by the company are distributed to the end users in almost two hundred countries through the company’s worldwide network of almost 220 dealers (Weygandt, et al 2010). The dealers of the company are owned independently, and they are operated businesses that have exclusive geographical territories. The dealers usually provide maintenance and repair services, sales, parts distribution, and rental of equipments. It is almost 65% of the sales of the company that are made by the either one of the sixty three dealers in the United States. The remaining 35% is sold by one of the 157 overseas dealers of the company. The company normally generates its income by licensing of the Cat and caterpillar trademarks and logos. The lines of business that the company operates through are financial products, machinery, and engines.
In the machinery line of business, it usually offer mining, construction, and forestry machines that include wheel and track tractors, pipe layers, wheel and track loaders, backhoe loaders log loaders, log skipper, track and wheel excavator, paving products, tunnel boring equipment, underground mining equipment and other related parts. In the engine line of business, it provide heavy fuel, natural gas, and diesel reciprocating engines for the electric power generation systems, marine, caterpillar machinery, construction, petroleum, agricultural, industrial, and other applications. It offers industrial turbine related services for gas and oil, and applications for power generation.
The business line in the financial products usually provide wholesale and retail financing alternatives for the caterpillar engines and machinery, solar gas turbines and other marine equipments. It also offers various forms of insurance and loans to dealers and customers. This line of business also provides financing for marine vessels, vehicles, and power generation facilities (Weygandt, et al 2010).Caterpillar usually sells the right to manufacture, market, and sell the products bearing the caterpillar trademarks and brand to the licensees around the world. An example of the company licensee is Wolverine WorldWide that is currently the sole manufacturer, and licensed to producing CAT branded footwear. Other items that are sold by other licensees include watches, hats, clothing, and other consumer products.
Company’s vulnerability
The situation of Caterpillar Inc is extremely challenging. A main problem that the company is facing is the high debt to the equity ratio. When a company has a high debt to the equity ratio, it means that the company has used a lot of outside financing like receiving loans so that to finance the company. This is what Caterpillar Inc has been doing that placing the company in this challenging situation. Caterpillar has been borrowing business loans meaning that much of the expenses of the business go back to the repayment of the loans.Another problem that the company is facing is the slow housing market in United States. Nevertheless, the ten to twenty percent revenue increase forecast in 2012 has persisted despite the expected continuation of the weak housing market in United States and the no new highway construction. The falling sales in Middle East and Africa are being caused by the political instability that is being experiences in these countries (Trueman et al 2011). Therefore, this is contributing to fall in the sales of the company to about 32% percent as compared to sales in 2010.
The poor corporate incentive system is a problem that the company is facing for the construction giant. In any organization, the incentive systems are usually extremely essential. Caterpillar Inc does not have an organized scheme for employee bonuses, prizes, and salaries. Because of the poor recognition system that is related to employee incentives, it has made it difficult for the company to retain talented employees into the company. This is an issue to the company as they do not provide employees with better incentives that will motivate people. The company finds it hard to keep the most talented employees since they have to be look for other organizations that will give them better salaries, rewards, and bonuses. The increase in the cost of raw materials is causing limited availability of the materials; therefore, the amount of money spent on raw materials has increased from the year 2009 to 2010 in a considerable way (Weygandt, et al 2010).
There is a strong competition in the global world. One of the big threats of the company is the Japanese competitors. The competitors include Hitachi and Komatsu. Komatsu is among the largest competitor to Caterpillar because it is among the second largest earth moving Equipment Company across the globe. Because of this danger, the company has decided to go to the Japanese market by use of joint venture with the Mitsubishi. Hitachi construction machinery focuses on mining equipment. This is a market that is not very competitive like the construction machinery. This company is setting a target that it will capture 30% share in the global market for large mining trucks that will challenge Caterpillar Inc and Komatsu. Hitachi has 40% market share in the mining excavators that weighs at least 190 ton. Therefore, in order for Caterpillar to get a better share of the business, it has to increase its participation in the Chinese housing market.
Financial performance
Caterpillar has an increase in revenues because of the $76 million favorable impact that is from the high average earning assets. The revenues of the company as at 2011 were reported to be $60.138 million (Dickie, R 2006). This is an indication of an increase of approximately 18 million as compared to 2010. The profit after tax that was recorded was $378 million or a 36% increase from that recorded in 2010. The company is planning on laying out $30 billion in the capital expenditure so that to avail itself in the growth opportunity, in the whole world. It includes lay down of the trucks so that to become over time as the leading builder of construction machinery. The current trend of the company appears to be promising, and its prospects are sharply increasing. Therefore, the company shares are expected to move from $112 to $122 (Dickie, R 2006). The company expects to acquire some small company; therefore, it can earn $10 per share in the year 2012. A lot of the company’s business is stagnant like large natural gas engines, solar turbines, and small construction machines (Orleman, E 2000). As this business start to recover, and the company is the acquisition of the small companies, it is likely for the company to increase its profits and reach $10 and the shares can get $120.
The success of the biofuels can enhance the sale of the agricultural equipment. The company’s agricultural equipment sector can improve if the nation start harvesting massive amounts of soybeans and corn so that to fuel its vehicles. Making a gallon of ethanol takes about 21 pounds of corn. This means that the demand for caterpillar tractors will increase of ethanol based on corn will take off. The first growth of the emerging market like India, China, and Mexico can benefit the company. This is because it has distribution channels that offer industrialization projects across the world with equipments. According to Orleman (2000), more than half of the company’s revenue is international.
Stock price analysis
Caterpillar Inc is a stock for holding. It is a stock which is likely to improve in the future in relation to its performance. The stock price of the company is at $110.52. The industrial industry is sensitive in economic cycles. Therefore, it is best looking for industrial investments that are undervalued during the economic recession. That is time when the prices of the stock are low and selling industrial investments when the prices of the stock are high. Globally, the economy is at recession meaning that this is the best time of buying industrial investments.
Income statement
| Period Ending |
Dec 30, 2011 |
Dec 30, 2010 |
Dec 30, 2009 |
||
| Total Revenue |
60,138,000 |
42,588,000 |
32,396,000 |
||
| Cost of Revenue |
44,404,000 |
31,281,000 |
24,931,000 |
||
| Gross Profit |
15,734,000 |
11,307,000 |
7,465,000 |
||
| Operating Expenses | |||||
| Research Development |
2,297,000 |
1,905,000 |
1,421,000 |
||
| Selling General and Administrative |
6,284,000 |
5,439,000 |
5,467,000 |
||
| Non Recurring |
– |
– |
– |
||
| Others |
– |
– |
– |
||
| Total Operating Expenses |
– |
– |
– |
||
| Operating Income or Loss |
7,153,000 |
3,963,000 |
577,000 |
||
| Income from Continuing Operations | |||||
| Total Other Income/Expenses Net |
(32,000) |
130,000 |
381,000 |
||
| Earnings Before Interest And Taxes |
7,121,000 |
4,093,000 |
958,000 |
||
| Interest Expense |
396,000 |
343,000 |
389,000 |
||
| Income Before Tax |
6,725,000 |
3,750,000 |
569,000 |
||
| Income Tax Expense |
1,720,000 |
968,000 |
(270,000) |
||
| Minority Interest |
(53,000) |
(58,000) |
68,000 |
||
| Net Income From Continuing Ops |
4,928,000 |
2,700,000 |
895,000 |
||
| Non-recurring Events | |||||
| Discontinued Operations |
– |
– |
– |
||
| Extraordinary Items |
– |
– |
– |
||
| Effect Of Accounting Changes |
– |
– |
– |
||
| Other Items |
– |
– |
– |
||
| Net Income |
4,928,000 |
2,700,000 |
895,000 |
||
| Preferred Stock And Other Adjustments |
– |
– |
– |
||
| Net Income Applicable To Common Shares |
4,928,000 |
2,700,000 |
|||
Balance sheet
| Period Ending |
Dec 30, 2011 |
Dec 30, 2010 |
Dec 30, 2009 |
|
| Assets | ||||
| Current Assets | ||||
| Cash And Cash Equivalents |
3,057,000 |
3,592,000 |
4,867,000 |
|
| Short Term Investments |
– |
– |
– |
|
| Net Receivables |
19,533,000 |
17,723,000 |
15,128,000 |
|
| Inventory |
14,544,000 |
9,587,000 |
6,360,000 |
|
| Other Current Assets |
994,000 |
908,000 |
862,000 |
|
| Total Current Assets |
38,128,000 |
31,810,000 |
27,217,000 |
|
| Long Term Investments |
13,211,000 |
12,221,000 |
13,355,000 |
|
| Property Plant and Equipment |
14,395,000 |
12,539,000 |
12,386,000 |
|
| Goodwill |
7,080,000 |
2,614,000 |
2,269,000 |
|
| Intangible Assets |
4,368,000 |
805,000 |
465,000 |
|
| Accumulated Amortization |
– |
– |
– |
|
| Other Assets |
2,107,000 |
1,538,000 |
1,632,000 |
|
| Deferred Long Term Asset Charges |
2,157,000 |
2,493,000 |
2,714,000 |
|
| Total Assets |
81,446,000 |
64,020,000 |
60,038,000 |
|
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