Sales Projections

Overview

The next step to valuing the company is to analyse Caterpillar’s statements so that a set of forward looking pro-formas can be built.

This can all only be done based on what we know, that is: CAT’s historical financial statements. The choice of pro-forma model parameters is accordingly based on an analysis of the company’s historicals, and on a number of judgement calls.

Sales Projections is one of the most critical elements of the Pro-Forma model. For example, we should ask:

  • Should projections be based on an historical analysis of the company? Or should it be based on expert opinion about the potential growth of the company’s particular industry?
  • Should we differentiate between short-term growth (next 5 years) and long-term growth?

None of these have a satisfactory answer! But we suggest using a pro-forma model to experiment with various answers to see whether they have an impact.

On this page, we experiment with three:

  • Year on Year Sales Growth
  • Cumulative Average Growth Rate (CAGR)
  • Regression on Sales on the Year


CAGR

As can be seen above, the CAGR has been calculated to be 10.44%.

This is a measure that is often used, however, because of its dependence on end points, it can be a problematic number. It can be a suspect measure of long-term growth, unless verified by other time spans. Even after playing with these end points, we find the CAGR to vary from between 3.22% to 13.79%

Y-o-Y Growth

As the chart above shows, the Year-on-Year growth of CAT exhibits a lot of variability.

Regression

The regression measure is not solely dependent on the starting or ending dates, and thus often provides a better estimation of future sales growth.

Sales

= a + b * Year
= -6,320,495 + 3,169 * Year, R-square = 75.79%

The line suggests that sales will grow at around 3,169 annually. Impounding the estimate into the latest sales figure, gives an annual growth rate of about 5.27%. On the whole, this is a more satisfactory estimate of sales growth*.

*Our baseline prejudice is that for a company in an established, old line business, the growth rate should be approximately the economy’s real growth rate plus inflation. 5.27% falls within the framework of this prejudice.