Buying Caterpillar Inc.(NYSE:CAT) for USD 93/101

Caterpillar Inc. (Caterpillar) is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company principally operates through its three product segments - Resource Industries, Construction Industries, and Power Systems - and also provides financing and related services through its Financial Products segment. The Company’s Construction Industries segment is responsible for supporting customers using machinery in infrastructure and building construction applications. The Resource Industries segment is primarily responsible for supporting customers using machinery in mine and quarry applications. Power Systems segment is primarily responsible for supporting customers using reciprocating engines, turbines and related parts across industries serving electric power, industrial, petroleum and marine applications as well as rail-related businesses.

• There are 14 companies in the farm and construction machinery sector. With a $49 billion market cap, Caterpillar (NYSE:CAT) is the largest.
•   On a PE basis, the company is slightly overvalued relative to the industry. Supporting this is the slightly better-than-average return on assets and equity. However, the company's growth is less than the industry average. Although the company is pretty fairly valued, its dominant industry position warrants a better-than-average PE.
• Caterpillar's balance sheet shows the company is financially well managed. Receivables decreased from 26% of assets in 2010 to 19% in 2014. Although the receivables turnover ratio has increased from 2.77 in 2010 to 3.25 in 2014, the size of the increase is statistically meaningless. Inventory increased from 14%/assets in 2010 to 17% in 2012, but returned to 14% over last two years.
•  Typically, the company is in a tough market environment with investors focused on the current weakness while the company is raking in cash and bullish on the long-term opportunity.
• Despite weak mining demand and low oil prices, Caterpillar Inc.’s first-quarter adjusted earnings improved 16% to $1.86 per share. Including restructuring costs, earnings stood at $1.81 in the quarter, up 26% from $1.44 in the prior-year quarter.
• Q1 Sales and revenues were $12.7 billion and that was about 4% less than the $13.2 billion that we had in the first quarter last year, $342 million of that decline in sales was a result of the stronger dollar, and sales volume was unfavorable $295 million. Those two items were partially offset by a small improvement in price realization that was $105 million, definitely in the right direction but less than 1%.
•  Q1 Profit per share though was higher in the first quarter than it was in the first quarter a year ago. This year it was $1.81 per share, a year ago in the first quarter it was a $1.44 a share.
•  In the quarter, cost of sales declined 6% year over year to $8.8 billion, while gross profit edged up 1% year over year to $3.8 billion. Selling, general and administrative (SG&A) expenses increased 2% to $1.3 billion and research and development (R&D) expenses went up 7% to $546 million due to stock-based compensation expense and higher spending for product introduction programs.As 30% of CAT's revenue is generated through the Construction industries segment, the disaster that hit Nepal during the recent weekend could lead to a situation of massive construction effort in the region. CAT's business should benefit from this effort. Below is a mapping of the main earthquake events in the recent decade based on The Washington Post's recent article alongside CAT yearly revenue.
• In the first quarter of last year, CAT had $0.17 per share of restructure costs and that was mostly from the actions that CAT took in our European operations. This year CAT had $0.05 per share of restructuring costs in the first quarter.
• So excluding restructuring profit per share improved from a $1.61 a year ago to a $1.86 in the current quarter. Now the primary reasons profit per share was up, number one was the $120 million gain that we had from the sale of our remaining ownership in what was our third-party logistics business.
•   Machinery, energy and transportation operating cash flow was a little over a $1 billion in the quarter, but that was about $800 million lower than the first quarter last year, and most of that decline came from higher incentive compensation payments in the first quarter of this year and they are based on performance in 2014.
• CAT used about $400 million of cash in the quarter to repurchase shares and with relatively modest needs for CapEx this year. CAT currently expect to continue to repurchase shares in 2015.

Catastrophic events around the world require massive construction equipment and machinery hence are positive for CAT's business. The more relevant catalyst for sales growth would be led through recovery in the commodities' prices. A hike in commodities and material demand would lead to a stronger demand for mining engines and equipment. A recovery in ETFs like MXI, iShare Commodities Selected Strategy ETF (COMT) or the mining leaders like BHP Billiton (NYSE:BHP) (NYSE:BBL) and Rio Tinto plc (NYSE:RIO) can be a good indication for an expected recovery in CAT's business.

CASH FLOW

Period Ending	Dec 31, 2014	Dec 31, 2013	Dec 31, 2012
Net Income	3,695,000	3,789,000	5,681,000
Operating Activities, Cash Flows Provided By or Used In
Depreciation	3,163,000	3,087,000	2,813,000
Adjustments To Net Income	553,000	482,000	389,000
Changes In Accounts Receivables	163,000	835,000	(15,000)
Changes In Liabilities	666,000	(625,000)	(2,828,000)
Changes In Inventories	101,000	2,658,000	(1,149,000)
Changes In Other Operating Activities	(300,000)	(49,000)	252,000
Total Cash Flow From Operating Activities	8,057,000	10,191,000	5,184,000
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures	(3,379,000)	(4,446,000)	(5,076,000)
Investments	(1,275,000)	(1,588,000)	(2,979,000)
Other Cash flows from Investing Activities	1,027,000	988,000	1,865,000
Total Cash Flows From Investing Activities	(3,627,000)	(5,046,000)	(6,190,000)
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid	(1,627,000)	(1,124,000)	(1,623,000)
Sale Purchase of Stock	(3,995,000)	(1,872,000)	(397,000)
Net Borrowings	2,444,000	(1,611,000)	5,434,000
Other Cash Flows from Financing Activities	-	-	-
Total Cash Flows From Financing Activities	(2,996,000)	(4,511,000)	3,606,000
Effect Of Exchange Rate Changes	(174,000)	(43,000)	(167,000)
Change In Cash and Cash Equivalents	1,260,000	591,000	2,433,000

Vtrade Capital Services recommend buying Caterpillar Inc.(NYSE:CAT)for USD 93/101 by 3rd quarter  this year