Caterpillar (CAT) Bull Bear Case

Bull/Bear Case BULL Best $6.35 15.7x $93 BEAR Worst EPS $5.0 P/E Price 12.1x $60.5 Bull Case Assumptions We assumed an EPS of 6.35, on the high end of the consensus estimate, and P/E of 15.7x, a 7% premium to the S&P 500 fwd. multiple base on historic 5 year average. Our bull case assumes 5% YoY growth in US construction spending to a little over $927 billion in the fourth quarter. Furthermore, continued growth and urbanization in emerging markets will lead to higher infrastructure development and will have a long-term impact on the company. The rental industry, which is another significant major buyer of machinery, will increase its capex in response to higher demand for rented machinery from smaller companies following increasing interest rates and macroeconomic uncertainty. 1 A pick up in emerging market growth led by China and India will result in order growth for CAT, leading to inventory stabilization. Rental Equipment Capex ($m) $5,000 $4,000 $3,000 $2,000 $1,000 $- 2004 2005 2006 2007 2008 2009 2010 2011 2012 Bear Case Assumptions Our bear case is based on an EPS of $5.0/share, on the low end of consensus estimates and a 17% discounted fwd. P/E multiple of S&P 500, which is what CAT stock is currently trading on. Our bear case assumes slow recovery in China, based on GDP growth of between 7% and 8%, which will lead to lower sales for the company's construction and mining segment. If mining capex falls by 15% as indicated by a recent survey of the industry, Caterpillar can expect Resources Industries segment sales to drop about 33% which can lead to 4Q segment sales falling around $3.8 billion down from $5.7 billion in the previous year. Continued decline in orders, led by the Resources Industries will lead to further inventory build up in the company's dealer networks. SOURCES: Company Data, SEC filings, Bloomberg Professional Services BIDNESS etc. DISCLAIMER: Bidness Etc(TM) and related marks are owned by Bidness Etc. Any other trademarks appearing on this website are the property of their respective owners, and are not used to indicate the origin of goods or services offered or provided by Bidness Etc herein or to suggest approval for or affiliation with Bidness Etc.