Caterpillar (CAT)

Total return at 5 years: -6.5%/year = -7.7% appreciation + 1.2% dividend. The target price ($535) is ex-dividend; the $41 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $685 · Multiples $465) is below the market price ($799).

Today — expensive, no margin of safety: at $799 trades ~71.8% above its value discounted to today (~$465); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Sobrevalorado: the expected total return is negative — the price already discounts a demanding scenario that, if not met, results in a loss.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$293.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($799) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The price discounts growth (9.6%/year) above our base case (6.0%/year) → it is priced for a demanding scenario and leaves little cushion against a slowdown.

That growth implies ~$17.1 bn of owner earnings in year 5 (vs ~$14.5 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on P/E — utilidad neta (mid-cycle). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Rolling grid: year 0 is the trailing twelve-month window ended June 30, 2026, incorporated from the 10-Q filed on August 5, 2026 — revenue of US$74.729 billion, operating profit of US$13.092 billion and net income of US$10.841 billion. Caterpillar is a cyclical industrial with a captive lender inside it (Cat Financial), and it is valued on a multiple of mid-cycle net income. Because the multiple runs on an after-interest profit, the cash and debt bridge stays at zero: the debt of the industrial operation and Cat Financial's funding are not subtracted again. The trailing window grew 18.4%, and that is not the starting point of the path. It laps a weak first half of 2025 —fiscal 2024 fell 3.4% and 2025 grew 4.3%— so the three-and-a-half-year trajectory the method requires looking at runs at around 4.4% compound annually since the close of 2023. The second quarter of 2026 was the first in the company's history above US$20 billion, with revenue of US$20.5 billion and a 24% rise that the release itself breaks down into US$3.1 billion of volume and US$595 million of price, with orders and backlog growing across all three primary segments. The August 4, 2026 release does not publish a quantitative revenue outlook for the year, and that is declared rather than assumed: the 5% to 7% compound growth target that the company does publish in its management discussion is what anchors the end point. The path starts at 8% —above the trajectory, because the backlog and price realization of around 2% support it— and decays geometrically to 5.5% by year 5, the midpoint of that own target. The margin is already at mid-cycle and therefore is not normalized downward: the operating margin of the trailing window is 17.5% against an average of 17.4% over the four prior fiscal years and the window itself (13.3% · 19.3% · 20.2% · 16.5% · 17.5%). What is rejected is expanding it: the mechanical re-anchoring took it to 19.6% by year 5, a step away from the 20.2% historical peak, and stacking that expansion on a record revenue level is the concatenated optimism the method forbids in a cyclical. It is held essentially flat, with modest operating leverage to 18.1%. The 21.9% adjusted operating margin of the second quarter is a quarterly peak and not the base. Year-0 capital expenditure is authored at US$4.575 billion because the tagged concept captures only one component: the cash flow statement separates "capital expenditures excluding equipment leased to others" (US$2.871 billion in the trailing window) from "expenditures for equipment leased to others", which totals US$1.704 billion over the same window (US$1.465 from fiscal 2025, plus US$847 from the first half of 2026, less US$608 from that of 2025). The buyback is modeled with the share path at the net reduction the XBRL series reveals, and the value per share is divided by the future share count. The adverse scenario is the downturn of the cycle: revenue falls and the margin retreats to 15.2%, with the buyback cut because in the downturn cash flow falls and it is the first thing to be adjusted, while the dividend is defended. The exit multiple stays at 14 times, within the historical range and without raising it to follow the record.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $535 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $799, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $535 in 5 years plus $41 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $465. Against the current market price ($799), the margin of safety is -71.8% (trades above the maximum → a premium is paid) and the total return at that price would be -6.5% annually.

• Multiple vs quality. P/E of 34× on mid-cycle earnings — a growth multiple on a cyclical.
• Reverse-DCF. For a 10% return, net income would need to triple (to ~$32bn, revenue >$150bn) — impossible for a cyclical.
• Margin of safety. Base -6% (negative); even the favorable scenario gives ~−3%. Strongly negative margin. Burry went short.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (101%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• ROIC exceeds the cost of capital. ROIC ~22% vs the 10% bar → strong value creation; a high-quality business.
• Margin (mid-cycle, not peak). Operating margin 16.5% TTM = the 5-year average, depressed by tariffs — not peak earnings.
• Owner earnings / conversion. MP&E FCF ~$9.5bn ≈ net income; low SBC (~$0.3bn). Solid cash generation.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

The engine is Power & Energy (turbines/gensets), driven by data-center power demand — Power Generation +32% in 2025, +41% in Q1'26. The backlog exploded from $30bn to $62.7bn. Construction and Mining (cyclical) are flat. The dealer network (150 dealers, 190 countries) is the moat; the aftermarket ($24bn in services) is the recurring revenue that smooths the cycle.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real, not nominal. The growth (+12% TTM) is real, driven by Power & Energy (data centers).
• Growth driver. Concentrated in Power & Energy; Construction/Mining flat. Depends on the AI power theme.
• Cyclicality. Revenue is at a cyclical high; is the power boom structural or a cycle? That's the question at the heart of the case.

• Relevant in 10 years (recurrence). Heavy machinery will keep being used; the aftermarket on the installed base is recurring. Medium recurrence (cyclical equipment + stable services).
• Pricing power. Strong on parts/aftermarket; on new equipment, more limited (competition + cycle).
• Moat and its direction. Wide and stable moat: the dealer network, hard to replicate. Threat: Chinese competition in construction.
• Cyclicality. Intrinsically cyclical business (construction/mining/commodities). Revenue is at a high — reversion risk.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $0 bn
• ✓Interest coverage (EBIT / interest)26.2x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 101% of ROIC
• ✓Value creation (ROIC − 10% bar)+12pp
• ✓Malinvestment test (capex vs incremental ROIC)Productive investment (1.8x)
• –Float / working capitalNeutral WC
• ✓Dilution (SBC % of revenue + shares)SBC 0.4% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Corporate leverage. MP&E's 'real' debt is only ~$11bn (the rest is Cat Financial's matched funding). Low.
• Cat Financial (lender). Excellent quality: delinquency 1.4% (improving), dealer 0%, low charge-offs, allowance 0.86%.
• Cash / conversion. MP&E FCF ~$9.5bn stable; mid-to-high A rating. Solid.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Skin in the game. Insiders <1%; no founder control. Ownership guidelines (CEO 6× salary). Orderly (internal) CEO transition.
• Capital allocation. Returns almost all FCF (aristocrat dividend + aggressive buybacks). But buying back at 34× and near highs is expensive.
• Value discipline (OPACC). Compensation tied to OPACC (economic profit with a 13% capital charge) — the same EVA concept as our method. A good sign.

• It's not cheap — quite the opposite: it trades at a growth multiple on the 'AI power stock' narrative.
• The market is extrapolating the data-center power boom as structural and permanent; the price already discounts it.
• Analyst consensus (price target ~$937-951) sits below the price — the market is running ahead of the sell side.

This is the opposite of an opportunity. Michael Burry — historically a CAT buyer — went short for the first time in his career, explicitly on valuation. If the power boom turns out to be a cycle (like every one of CAT's before), the multiple collapses.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -18%/year (-63% total): the margin of safety protects the downside. The bull (-1%/year, -3% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Bubble multiple. Growth multiple on a cyclical — the central disconfirmer; if the AI boom cools, it collapses.
• Cyclicality. Revenue at a cyclical high; a construction/mining recession hits asymmetrically.
• Tariffs. $2.2-2.4bn in 2026 (Section 232 steel); compresses CI/RI margins.
• Chinese competition. Sany, XCMG gaining share in construction; pricing pressure.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 22% above the 10% bar, but the price sits above value (no margin) → great business, expensive.

• Peter Lynch Growth at a reasonable price (GARP)

  A cyclical growing 6% at a PEG of 5.7 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 4% (EBIT/EV) + ROIC 22% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 10% vs our 6%: priced for perfection, no favorable mispricing.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -20%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, efficient scale, intangibles, cost advantage → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  The price implies 10% vs our 6%: coherent, but at the optimistic end of the range.