Caterpillar Inc (CAT)

Conclusion

Caterpillar Inc (CAT.US) makes construction and mining equipment, large engines, industrial gas turbines and diesel-electric locomotives, and it runs a financial products arm that leases and finances its machines. At the 2026-11-04 close the shares traded at 591.30 USD, giving a market capitalisation of 271.8 billion USD and an enterprise value of 309.1 billion USD.

The verdict is overvalued. The price-to-earnings ratio of 22.976 compares with a ten-year median of 17.2132, a premium of 33.5%, and enterprise value to EBITDA of 16.8757 compares with a median of 13.4656, a premium of 25.3%. The DCF gives 376.54 USD per share at a discount rate of 12.79%. The fair value band runs from 327.81 to 491.72 USD with a midpoint of 409.77 USD, a margin of safety of -30.7% at the current price. The reverse DCF implies growth of 14.95% a year, against revenue growth of 10.1% a year over five years and free cash flow per share growth of 15.66% a year over the same period.

What holds the case up is a return on invested capital of 20.6% against a WACC of 11.5%, free cash flow conversion of 98.3% over the last twelve months, and an Altman Z-score of 4.28. What would break it is net debt to EBITDA of 2.04, a price-to-book ratio of 12.65 against a ten-year median of 7.10, and a Piotroski score of 6 out of 9. The growth the price implies is above the growth delivered, so the case depends on the recent pace being sustained.

Financial health

Financial strength is green, held up by interest coverage of 18.1, a current ratio of 1.42 and an Altman Z-score of 4.28 in the safe zone. Net debt to EBITDA of 2.04 is neutral and the quick ratio of 0.80 is lower than the current ratio. Debt to equity stands at 2.10. The Altman model was designed for manufacturers, and the company's financial products segment carries its own lending exposure that the model does not isolate. Insolvency risk: low, about 0.9% by the estimate of the Ohlson model over one to two years.

Earnings quality

Earnings quality is yellow. Free cash flow conversion is 98.3% over the last twelve months but 83.3% on a five-year basis, which is neutral. The accrual ratio of -0.0308 means reported earnings are backed by more cash than accruals suggest. Stock-based compensation is negligible at -0.14% of revenue, and free cash flow after it is 11.7 billion USD. The share count fell at a five-year compound rate of 3.1%, which indicates buybacks. The Piotroski score is 6 out of 9. The Beneish M-score is not available. The company beat earnings estimates in 6 of the last 8 quarters, with an average surprise of 8.5%. Estimate revisions are mixed: the current-year estimate rose 11.2% over 90 days, and the next-year estimate rose 5.8%, with one upward and one downward change in the last 30 days.

Profitability

Profitability is green. The gross margin of 34.3% is above its ten-year median of 30.2%, the operating margin of 18.3% is above 14.3%, and the net margin of 15.2% is above 11.3%. Return on invested capital is 20.6% against a WACC of 11.5%, with a return on invested capital minus WACC of 9.1%, and the five-year median return on invested capital is 17.5%. Return on equity of 55.1% is inflated by leverage. The DuPont split shows a net margin of 13.1%, an asset turnover of 0.69 and an equity multiplier of 4.62, so most of the equity return comes from the balance sheet rather than from margins alone.

Growth

Growth is green. Revenue compounded at 4.4% over three years, 10.1% over five years and 3.7% over ten years. Earnings per share compounded at 14.4% over three years, 28.2% over five years and 16.3% over ten years. Free cash flow per share compounded at 17.7% over three years and 15.7% over five years. Revenue grew in 6 of the last 10 years. The consensus estimate for next year's earnings per share implies growth of 17.2%.

Valuation

Valuation is red. The price-to-earnings ratio of 22.976 is a 33.5% premium to its median of 17.2132, and the price-to-book ratio of 12.65 is a 78.2% premium to its median of 7.10. The DCF gives 376.54 USD per share at a discount rate of 12.79%, with a terminal share of 43%. The fair value from historical multiples is 442.99 USD. The fair value band runs from 327.81 to 491.72 USD with a midpoint of 409.77 USD, a margin of safety of -30.7% at a price of 591.30 USD. The reverse DCF implies growth of 14.95%, against 10.1% revenue growth over five years. The dividend yield is 1.05% and the payout on free cash flow is 24.5%.

Risks

Net debt to EBITDA of 2.04 means that a fall in earnings would raise leverage quickly, and the Ohlson estimate would move with it. A price-to-book ratio of 12.65 means that any slowdown in return on equity would weigh heavily on the share price, because the premium to historical multiples is already large. The Piotroski score of 6 leaves room for weaker cash flow to lower the quality rating. The Beneish M-score is not available, so manipulation risk in the reported numbers cannot be checked with the data provided. The fair value depends on fixed assumptions, including a 5% equity risk premium and capped growth. This analysis has no debt maturity schedule and no revenue by segment, so it cannot show which parts of the business carry the growth or the debt.