Caterpillar Inc. (NYSE: CAT)

Transcription

1 Nov 23, 2015 Caterpillar Inc. (NYSE: CAT) $71.14 USD ( As of 11/20/15 ) Zacks Rank 4-Sell Style Scores: Growth: Value: Momentum: Data Overview 52 Week High-Low $ $ Day Average Volume 5,875,883 Beta 1.62 Market Cap B Dividend / Div Yld $3.08 / 4.33% Industry MACH-CONST/MNG Industry Rank 250 / 265 (Bottom 6%) Growth Score Hist. EPS Growth (3-5 yrs) -1.60% Proj. EPS Growth (F1/F0) % Curr. Cash Flow Growth 4.31% Summary Caterpillar s third-quarter 2015 adjusted earnings dropped 56% to 75 cents per share, reflecting the ongoing weakness in mining, and oil and gas industries. For 2015, the company maintained its revenue guidance of $48 billion but lowered earnings per share guidance to $4.60. With the 5% decline in revenues apprehended for 2016, the company is looking at the fourth consecutive year of decline, as never seen before in its nine decade long operations. This disappointing guidance is due to weak economic growth in the United States and Europe. U.S. construction activity is being impacted by low infrastructure investment, continued headwinds from oil and gas, slowdown in China, recession in Brazil and lower commodity prices. Elements of the Zacks Rank Agreement Estimate Revisions (60 days) Hist. Cash Flow Growth (3-5 yrs) 14.16% Current Ratio % 80% 100% 100% Debt/Capital 61.22% Net Margin 5.87% Q1 (Current Qtr) Q2 (Next Qtr) F1 (Current Year) F2 (Next Year) Return on Equity 19.08% Sales/Assets 0.61 Revisions: 9 Up: 0 Down: 9 Revisions: 5 Up: 1 Down: 4 Revisions: 9 Up: 0 Down: 9 Revisions: 11 Up: 0 Down: 11 Proj. Sales Growth (F1/F0) % Magnitude Consensus Estimate Trend (60 days) Value Score Cash/Price 0.15 EV/EBITDA 6.41 PEG Ratio 2.62 Price/Book (P/B) Current Current Current Current Price/Cash Flow (P/CF) 5.91 Q % Q % F1-6.88% F % P/E (F1) Price/Sales (P/S) 0.81 Upside Zacks Consensus Estimate vs. Most Accurate Estimate Earnings Yield 6.57% Debt/Equity 1.58 Cash Flow ($/share) Momentum Score Most Accurate: 0.70 Zacks Consensus: 0.72 Most Accurate: 0.96 Zacks Consensus: 0.96 Most Accurate: 4.61 Zacks Consensus: 4.60 Most Accurate: 3.62 Zacks Consensus: 3.66 Daily Price Chg -0.43% Q1-2.78% Q2 0.00% F1 0.22% F2-1.09% 1 Week Price Chg -0.06% 4 Week Price Chg -1.21% Surprise Reported Earnings History 12 Week Price Chg -7.45% 52 Week Price Chg % 20 Day Average Volume 5,875,883 (F1) EPS Est Wkly Chg 0.00% (F1) EPS Est Mthly Chg -0.55% Reported: 0.75 Estimate: 0.75 Reported: 1.27 Estimate: 1.25 Reported: 1.86 Estimate: 1.35 Reported: 1.35 Estimate: 1.55 Average 4 Qtr Surprise (F1) EPS Est Qtrly Chg -7.07% Q End 09/15 Q End 06/15 Q End 03/15 Q End 12/14 (Q1) EPS Est Mthly Chg 0.77% 2015 Zacks Investment Research, All Rights Reserved 10 S. Riverside Plaza Suite 1600 Chicago, IL 60606

2 The data on the front page and all the charts in the report represent market data as of 11/20/15, while the reports text is as of 11/23/2015 Overview Caterpillar (CAT) is the world s leading manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. It is also a leading exporter in the U.S. with more than half of its sales being generated outside the United States. Caterpillar operates through two divisions Machinery & Energy & Transportation systems and Financial Products. Machinery, Energy & Transportation (Approximately 94% of total revenue in the third quarter of 2015) includes the following segments - Construction Industries This segment is responsible for small and core construction machines. Resource Industries This segment takes care of the business strategies, product design, product management and development, manufacturing, marketing and sales along with product support for large track-type tractors, hard rock vehicles,and other equipment. Energy & Transportation This segment supports customers by providing them with reciprocating engines, turbines, diesel-electric locomotives and related parts across industries, catering to power generation, industrial, oil and gas and transportation applications. It also manages marine and rail-related businesses. All Other Segments These segments primarily include activities such as the re-manufacturing of CAT engines and components and re-manufacturing services for other companies as well as product management, development, manufacturing, marketing and product support. Financial Products Segment (6%) This segment provides financing to customers and dealers for the purchase and lease of Caterpillar and other equipment. Zacks Equity Research: CAT Page 2 of 9

3 Reasons To Sell: For 2015, the company maintained its revenue guidance of $48 billion. On Sep 24, the company had trimmed its revenue guidance to $48 billion, which is $1 billion lower than the previous expectation, due to broadly weaker business conditions across its three large segments Construction Industries, Energy & Transportation and Resource Industries. Caterpillar expects earnings per share of $4.60 in 2015, excluding restructuring costs, lower than its previous outlook of $5.00 provided during secondquarter conference call. Caterpillar s results continue to bear the brunt of weak mining demand and lower oil prices. On top of this, increased R&D expenses and lower backlog remain concerns. Due to additional restructuring actions, the company s expectation for restructuring costs in 2015 has increased substantially from about $250 million to about $800 million. For 2016, the company expects sales to be 5% below 2015 levels with decline across all three of its major segments. If this materializes, the company s revenues would drop for four years in a row for the first time in its nine-decade long operations. Sales in Construction Industries' are expected to be flat to down 5% as improvement in developed countries will be offset by declining sales in developing countries. Energy & Transportation's sales are expected to decline 5% to 10% affected by continuing weakness in oil and gas along with a weaker order backlog compared with Weak mining sector will again lead to a decline in Resource Industries' sales by about 10%. The guidance reflects weak economic growth in the United States and Europe. U.S. construction activity is being impacted by low infrastructure investment and continued headwinds from oil and gas. It also factors in the slowdown in China, recession in Brazil and lower commodity prices. A stronger dollar will keep revenues in check. Moreover, given the continued weakness in agriculture, sales of industrial engines will be down. Persistent economic weakness in China and Brazil as well as uncertainty in the eurozone add to the company s woes. At the end of the third quarter, Caterpillar s backlog was $13.7 billion, down $1.1 billion sequentially. Backlog has declined 23% on a year-over-year basis and 15% since the start of The decrease was primarily in Energy & Transportation and Resource Industries. Research & development expense is likely to remain a headwind as the company continues to invest in new and updated products, and increase work on new technologies, that have applications across the company, in order to stay competitive. Risks Caterpillar has perked up its restructuring actions that are expected to lead to annual savings of $1.5 billion in operating costs, once they are executed, with about $750 million expected in Within next year, Caterpillar plans to terminate up to 5000 salaried and management personnel. Through 2018, total 10,000 positions will be eliminated. The company has already offered a voluntary retirement enhancement program to qualifying U.S. employees and more than 2,000 participants are in the program. Caterpillar has also offered several voluntary separation programs outside of the United States and expects further reductions in the fourth quarter of 2015 from its flexible workforce and involuntary employee separation programs. Caterpillar also plans to close an estimated 20 manufacturing plants, which accounts for slightly more than 10% of its manufacturing square footage. Caterpillar s efforts to lower Selling, General and Administrative (SG&A) costs will be largely in place and effective in This will enable it to attain slightly less than half of the $1.5 billion cost reduction target. Lower period manufacturing costs, including savings from additional contemplated facility consolidations and closures, which could impact more than 20 facilities and slightly more than 10% of its manufacturing square footage, will contribute rest of the savings. Caterpillar s efforts to reduce costs, continued deployment of lean manufacturing initiatives and improvement in the Construction segment will help mitigate the effect of lower mining-related sales on its profits. The company continues to invest in new technologies, innovation and data analytics. Caterpillar repurchased approximately $1.5 billion of its common stock during the third quarter of This is in addition to around $500 million worth of stock repurchased in the first half of 2015, and $4.2 billion repurchased in Caterpillar ended the quarter with cash and short-term investments of $6.05 billion while its debt-to-capital ratio at ME&T was 37.4%, within its targeted range of 30% to 45%. Further share repurchases will be accretive to earnings. In June, Caterpillar hiked its quarterly dividend by 10% to $0.77 per share. The move reflects the company s commitment toward delivering incremental returns to shareholders as well as balance sheet strength. So far in fiscal 2015, Caterpillar has returned $3.3 billion to its shareholders through share repurchases and dividends. Although still below prior peaks, construction-related activity continues to improve. The Architecture Billings Index, which is considered a leading indicator of U.S. non-residential construction, has remained above 50 in the recent months, signaling robust conditions ahead for the construction industry. Improvement in the construction sector will help to somewhat compensate the impact of the weak mining sector. Last Earnings Report Caterpillar Q3 Earnings Lag Y/Y, Cuts 2015 EPS Guidance Caterpillar s third-quarter 2015 adjusted earnings declined 56% to $0.75 per share, reflecting the ongoing weakness in mining, and oil and gas industries. Earnings, however, Quarter Ending 09/2015 Report Date Oct 22, 2015 Sales Surprise -1.33% Zacks Equity Research: CAT Page 3 of 9

4 came in line with the Zacks Consensus Estimate. The company s shares went down 4.08% in pre-market trading session following the release. Including restructuring costs, earnings were $0.62 in the quarter, down 62% from $1.63 in the prior-year quarter. EPS Surprise 0.00% Quarterly EPS 0.75 Annual EPS (TTM) 5.23 Revenues Revenues declined 19% year over year to $10.96 billion in the quarter, failing to match the Zacks Consensus Estimate of $11.11 billion due to unfavorable currency impact along with lower volumes. Sales declined for both new equipment and aftermarket parts. Caterpillar witnessed revenue decline across all regions. Latin America fared the worst, registering a 31% drop in sales, mainly due to lower end-user demand affected by widespread economic weakness across the region. Sales in Asia/Pacific declined 25% due to lower demand for construction and mining equipment as well as products used in oil and gas applications, coupled with unfavorable impact from currency translation. In North America, Caterpillar witnessed a 17% decline in sales due to lower end-user demand for Energy & Transportation applications and construction equipment. Sales in Europe, Africa and Middle East (EAME) declined 13% because of unfavorable currency impact and lower demand for products used in mining equipment and power generation applications. Costs & Operating Profit In the quarter, cost of sales declined 17% year over year to $7.95 billion. Gross profit dipped 23% year over year to $3 billion. Selling, general and administrative (SG&A) expenses decreased 15% to $1.2 billion due to lower incentive compensation expense, partially offset by new product introduction programs. Research and development (R&D) expenses remained flat at $534 million. Operating profit was at $713 million, down 49% year over year due to unfavorable price realization and lower volume. Segment Results Machinery and Energy & Transportation (ME&T) sales decreased 19% year over year to $10.3 billion. Sales in Energy & Transportation dipped 25% due to decline in sales across end-user applications and unfavorable impact of foreign exchange. Sales in Resource Industries fell 17% because of lower demand. Construction Industries' sales declined 15% due to lower end user demand and unfavorable impact of currency exchange. The ME&T segment s operating profit decreased 53% to $590 million in the quarter. Operating profit decreased 22% in the Construction Industries owing to lower volume and unfavorable price realization. Operating profit went down 45% in the Energy & Transportation segment as a result of lower sales volume. Resource Industries incurred a loss in the quarter as against profit in the year-ago quarter due to lower sales volume and higher spending for new products, partially offset by favorable warranty, lower incentive compensation expense and improved material costs. Financial Products net revenues decreased 12% to $752 million due to lower average earning assets in Asia/Pacific, EAME and Latin America, partially offset by higher average earning assets in North America and lower average financing rates. Financial Products profits declined to $207 million in the quarter from $220 million in the prior-year quarter. Financial Position Caterpillar ended the third quarter with cash and short-term investments of $6.05 billion, down from $7.34 billion as of 2014-end. Total debt-to-capital ratio was at 70% as of third-quarter end, flat compared with 2014-end. The debt-to-capital ratio at ME&T was 37.4% as of Sep 30, 2015 flat with that as of Dec 31, 2014, and at about midpoint of the company s target range of 30% to 45%. Total cash flow from operating activities in the first nine months of 2015 was $4.9 billion compared with $6.2 billion in the prior-year period. Operating cash flow at ME&T was $766 million in the quarter, down from $1.44 billion in the year-ago quarter. Caterpillar repurchased approximately $1.5 billion of its shares during the third quarter of So far in fiscal 2015, Caterpillar has returned $3.3 billion to its shareholders through repurchase of common stock and payment of dividends. Backlog At the end of the quarter, Caterpillar s backlog was $13.7 billion, down from $14.8 billion at the end of second-quarter The decrease was due to Energy & Transportation and Resource Industries. Guidance for 2015 For 2015, the company maintained its revenue guidance of $48 billion. On Sep 24, the company had trimmed its revenue guidance to $48 billion, which is $1 billion lower than the previous expectation, due to broadly weaker business conditions across its three large segments Construction Industries, Energy & Transportation and Resource Industries. Caterpillar expects earnings per share of $4.60, excluding restructuring costs in This is lower than the company s previous earnings per share outlook, provided during its second-quarter 2015 conference call, wherein the company had provided a guidance of $5.00 per share on the back of revenues of about $49 billion. The additional restructuring actions announced in September are Zacks Equity Research: CAT Page 4 of 9

5 expected to increase its restructuring costs from about $250 million to about $800 million. Sneak Peek into 2016 For 2016, the company expects sales to be 5% below 2015 levels with decline across all three of its aforementioned major segments. Sales in Construction Industries' are expected to be flat to down 5% as improvement in developed countries will be offset by declining sales in developing countries. Energy & Transportation's sales are expected to decline 5% to 10% affected by continuing weakness in oil and gas along with a weaker order backlog than in Weak mining sector will again lead to a decline in Resource Industries' sales by about 10%. The guidance reflects weak economic growth in the United States and Europe with U.S. construction activity being impacted by low infrastructure investment and continued headwinds from oil and gas. It also factors in the slowdown in China, recession in Brazil and lower commodity prices. Recent News Caterpillar's October Sales Drop of 16% Worst in 5 Years - Nov 20, 2015 Caterpillar reported a 16% decline in its global retail sales for the three months ending Oct 2015, the biggest monthly decline since Feb The company, which is considered the bellwether of economic activities, is facing its worst patch with sales growth in the red for 35 consecutive months due to the crash in commodity prices, soft mining demand and the slowdown in China. Year-to-date, the company s sales have dropped by an average 12%. So far in 2015, the previous worst performances were witnessed in January and June, wherein sales of each month declined 14%. The sales graph seemed to have reached a plateau with the 11% declines over the past three months but the October performance has dragged the graph down. Caterpillar had last suffered sales decline for a 19-month stretch, spanning from Oct 2008 to Apr 2010 due to the global recession. As per Caterpillar s October sales report, overall sales performance was dragged down by a 36% slump in Latin America. Sales in Asia Pacific dipped 28% while in EAME and North America it declined 13% and 8% respectively. Overall sales in Resource Industries, which continues to bear the brunt of weak mining spending due to lower commodity prices, were down 25%. Asia/Pacific led the pack with a 37% decline, while EAME was down 33% followed by 22% drop in Latin America. North America was down 10%. Sales in Construction Industries were down 14% year over year, mainly hit by Latin America (41%) which was followed by Asia/Pacific (25%). Sales in North America and EAME were down 9% and 3%, respectively. Sales in the Energy & Transportation segment fell 27%, mainly due to a 56% plunge in the Transportation sector. Sales in the Oil & Gas sector declined 34% followed by the Industrial segment which dipped 21%. The Power Generation sector, however, increased 3%. Caterpillar s Monthly Sales Dip Yet Again Oct 21, 2015 Monthly sales growth of Caterpillar continues to be in the negative territory. The construction and mining equipment behemoth reported an 11% fall in its global retail sales for the three months ending Sep In September this year, overall sales performance was dragged down by a 35% slump in Latin America. Sales in Asia Pacific dipped 17% while in EAME and North America it declined 7% and 5% respectively. Overall sales in Resource Industries, which continues to bear the brunt of weak mining spending due to lower commodity prices, were down 6%. EAME was down 13% followed by an 8% drop in both Latin America and Asia/Pacific. Increase in sales was only witnessed in North America (2%) but it was not enough to mitigate the declines elsewhere. Sales in Construction Industries were down 13% year over year, mainly hit by Latin America (47%) which was followed by Asia/Pacific (21%). Sales in North America and EAME were down 8% and 3%, respectively. Sales in the Energy & Transportation segment fell 23%, mainly due to a 34% plunge in the Transportation sector. After delivering growth of 72% in January, 39% in February and 20% in March, the segment slipped into the negative territory in April. Sales in the Oil & Gas sector declined 31% followed by the Industrial segment which dipped 20%. The Power Generation sector was also down 5%. Caterpillar Maintains Dividend Rate - Oct 14, 2015 Caterpillar's Board of Directors maintained the quarterly cash dividend of $0.77 per share of common stock. Caterpillar Announces New Organizational Structure- Sept 24, 2015 Caterpillar announced a reorganization, effective November 1, 2015 in its dealer and customer support divisions in a bid to improve and speed the delivery of customer support while simplifying the way Caterpillar interacts with its global dealer network. The company is also placing added executive office emphasis on three strategic initiatives data analytics, digital and innovation capabilities; Lean Transformation; and the Across the Table initiative. Having this additional, executive office focus complements the new structure of Caterpillar s customer and dealer-facing divisions. Zacks Equity Research: CAT Page 5 of 9

6 Chris Curfman, vice president responsible for Caterpillar s Mining Sales & Support Division is retiring, effective December 31, His division will be integrated into the existing Global Mining machine business divisions. Bringing product, operations, sales and marketing organizations together in both the surface and underground mining applications aligns well with our customers and will also enable a more effective cost structure in a challenging mining environment. The surface mining sales and support teams will join the Hauling & Extraction Division, which will be renamed the Surface Mining & Technology Division, led by Caterpillar Vice President Tom Bluth. The underground mining sales and support teams will join the Material Handling and Underground Division, led by Caterpillar Vice President Denise Johnson. The company is reorganizing divisions across the company into a new structure that will improve efficiency and reduce complexity. This new organizational structure will enable the company to more quickly deliver on its previously announced Across the Table goals. Distribution Services Divisions which is the primary interface with its dealers, will be reduced to two from three. The two groups will maintain sole responsibility for dealer development and performance, succession and continuity, along with portfolio management, operational excellence and Across the Table strategy execution. The Asia Pacific, CIS, Africa & Middle East Distribution Division headed by Vice President Raymond Chan will covers dealers in Asia-Pacific, CIS, Africa and the Middle East. Americas & Europe Distribution Division headed by Vice President Phil Kelliher covers dealers in North and South America and Europe. Global Aftermarket Solutions Division under Vice President Nigel Lewis has been created to accelerate the growth of aftermarket sales and service solutions. This organization combines the aftermarket sales and marketing resources, with a focus on improving and growing aftermarket sales and service for Resource Industries, Construction Industries and Energy & Transportation, including Cat Work Tools and Cat Reman products. Wear Components & Aftermarket Distribution Division under Vice President Doug Hoerr is a new division that merges the design and manufacturing of components and aftermarket distribution into one division to enhance the company s focus on components availability and inventory improvements. This organization will be closely aligned with the Global Aftermarket Solutions Division to ensure product offerings meet or exceed customer and dealer expectations. Marketing and Digital Division under Vice President George Taylor is a newly created division that builds on the current Analytics & Innovation Division. Taylor, who has also been named Caterpillar s Chief Marketing Officer, and his team will establish a go-to-market strategy for the integration of data analytics, providing state-of the-art solutions and support for customers and dealers. In addition to the digital transformation of the dealer and customer experience, the division s functions include global brand management, marketing, rental services and retail sales development. Sustainable, Work Tools & Industry Solutions Division under Vice President Greg Folley is a new division that brings together the sustainable businesses of Cat Reman and Caterpillar Safety Services with the company's machine attachment business Cat Work Tools (design and manufacture). The new division also includes two external sales groups, Cat OEM Solutions and Defense and Federal Products. In addition to these changes, the Global Construction & Infrastructure Division, led by Vice President Paolo Fellin, has added responsibilities. As part of the company s move to improve its dealer and customer coverage model, the division will also assume sales responsibilities for work tools, industrial and waste, paving and forestry products, as well as responsibility for heavy rentals. Zacks Equity Research: CAT Page 6 of 9

7 Industry Analysis Zacks Industry Rank: 250 / 265 (Bottom 6%) Top Peers AGCO CORP (AGCO) ALTRA INDUS MOT (AIMC) ASTEC INDS INC (ASTE) H&E EQUIP SVCS (HEES) JOY GLOBAL INC (JOY) KOMATSU LTD ADR (KMTUY) LONKING HOLDING (LONKF) MANITOWOC INC (MTW) TEREX CORP (TEX) Industry Comparison Mach-const/mng Position in Industry: 3 of 8 Industry Peers CAT Market Cap B # of Analysts 16 Dividend Yield 4.40% Growth Score Hist. EPS Growth (3-5 yrs) -1.60% Proj. EPS Growth (F1/F0) % Curr. Cash Flow Growth 4.31% Hist. Cash Flow Growth (3-5 yrs) 14.16% Current Ratio 1.37 Debt/Capital 61.22% Net Margin 5.87% Return on Equity 19.08% Sales/Assets 0.61 Proj. Sales Growth (F1/F0) % X Industry S&P B B % 1.94% % 8.43% % 5.66% -2.85% 6.85% 12.92% 10.40% % 39.91% 4.18% 9.41% 10.60% 17.43% % 0.78% ASTE HEES JOY M M 1.47 B % 6.03% 5.29% -0.07% 37.28% 8.82% % -4.04% 20.82% % 10.71% 16.63% -1.79% % 81.86% 3.74% 4.61% 6.18% 36.34% % -5.22% Value Score - - Cash/Price EV/EBITDA PEG Ratio Price/Book (P/B) Price/Cash Flow (P/CF) P/E (F1) Price/Sales (P/S) Earnings Yield 6.69% 5.41% 4.26% 7.35% % Debt/Equity Cash Flow ($/share) Momentum Score - - Daily Price Chg 1 Week Price Chg 4 Week Price Chg 12 Week Price Chg 52 Week Price Chg 20 Day Average Volume (F1) EPS Est Wkly Chg (F1) EPS Est Mthly Chg (F1) EPS Est Qtrly Chg (Q1) EPS Est Mthly Chg 0.00% 0.03% -0.06% -0.03% -1.01% 0.49% -3.64% 3.90% % 1.01% 276,451 2,719, % 0.00% -0.28% 0.00% -5.68% -0.14% 0.38% -1.18% 2.45% -2.98% -1.50% -0.06% -0.11% -0.13% 19.00% -3.85% % 3.20% -1.51% % -3.13% % % 136, , % 0.00% 0.00% -5.26% -4.29% 0.00% % -4.29% % -2.70% % 0.00% Zacks Equity Research: CAT Page 7 of 9

8 Zacks Rank Education The Zacks Rank is calculated from four primary inputs: Agreement, Magnitude, Upside and Surprise. Agreement This is the extent which brokerage analysts are revising their earnings estimates in the same direction. The greater the percentage of estimates being revised higher, the better the score for this component. For example, if there were 10 estimate revisions over the last 60 days, with 8 of those revisions up, and the other 2 down, then the agreement factor would be 80% positive. If, however, 8 were to the downside with only 2 of them up, then the agreement factor would be 80% negative. The higher the percentage of agreement the better. Magnitude This is a measure based on the size of the recent change in the current consensus estimates. The Zacks Rank looks at the magnitude of these changes over the last 60 days. In the chart to the right, the display shows the consensus estimate from 60-days ago, 30-days ago, 7-days ago, and the most current estimate The difference between the current estimate and the estimate from 60-days ago is displayed as a percentage. A larger positive percentage increase will score better on this component. Upside This is the difference between the most accurate estimate, as calculated by Zacks, and the consensus estimate. For example, a stock with a consensus estimate of $1.00, and a most accurate estimate of $1.05 will have an upside factor of 5%. This is not an indication of how much a stock will go up or down. Instead, it's a measure of the difference between these two estimates. This is particularly useful near earnings season as a positive upside percentage can be used to help predict a future surprise. Surprise The Zacks Rank also factors in the last few quarters of earnings surprises. Companies that have positively surprised in the recent past have a tendency of positively surprising again in the future (or missing if they recently missed). A stock with a recent track record of positive surprises will score better on this factor than a stock with a history of negative surprises. These stocks will have a greater likelihood of positively surprising again. Zacks Style Score Education The Zacks Style Score is as a complementary indicator to the Zacks Rank, giving investors a way to focus on the best Zacks Rank stocks that best fit their own stock picking preferences. Academic research has proven that stocks with the best Growth, Value, and Momentum characteristics outperform the market. The Zacks Style Scores rate stocks on each of these individual styles and assigns a rating of A, B, C, D and F. An A, is better than a B; a B is better than a C; and so on. Growth Score Value Score Momentum Score As an investor, you want to buy stocks with the highest probability of success. That means buying stocks with a Zacks Rank #1 or #2, Strong Buy or Buy, which also has a Style Score of an A or a B. Zacks Equity Research: CAT Page 8 of 9

9 Disclosures The analysts contributing to this report do not hold any shares of this stock. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts' personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. Zacks Equity Research: CAT Page 9 of 9