Question

• How would you assess the Caterpillars market and industry performance based on its five-year revenues and earnings results?
• How does Caterpillars five-year performance compare to its industry peers over the same time period?
• What portfolio recommendations or asset allocation strategies might you consider to improve investment performance?

Answer 1

The question consists of three sub questions. Let me answer the third question first.The reason for answering the third question first as its a theoretical question and the other two are application based questions.

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• What portfolio recommendations or asset allocation strategies might you consider to improve investment performance?

The answer to this question would be:

Asset Allocation mainly means allocating your surplus income into various/different asset classes which would be used to earn Dividends, Interests and Capital Appreciation. Asset Classes would be :

1. Equities
2. Fixed Income/Bonds
3. Exchange Traded Funds (ETF's)
4. Gold
5. Cash(Very Little)

The proportion of distribution varies according to the Risk Appetite of the investor. A proper mix of asset classes would result in an investor having a Winning Portfolio. Ideally the suggested mix of asset classes for a person who is willing to take risks would be as shown below in the pie chart:

By following the above asset allocation strategy performance of the investments of the investor could be beneficial.

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Now let us take up the first question.

• How would you assess the Caterpillars market and industry performance based on its five-year revenues and earnings results?

The answer to this question would be:

It is important for us to understand what are the various business segments of Caterpillar Inc then we could compare and analyze the market and industry performance

The segments in which the company operates are:

1. Construction Industry Machines
2. Engines
3. Financing and Insurance
4. Machinery
5. Resource Industries

On analyzing the financial statements for the previous five years i.e. from 2014 to 2018 we could see that there was a dip in earnings in the year 2016 and the company incurred a huge loss. However it recovered back in 2017 and its Free Cash Flow improved drastically which in return improved the Earnings Per Share and the other ratios for the company.The company gained on the foreign exchange transactions also during the year.

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Let us answer the second question

• How does Caterpillars five-year performance compare to its industry peers over the same time period?

The answer to the above question would be:

To analyze the performance of Caterpillar Inc by comparing it with its industry peers we need to do an analysis segment wise or business wise to get the correct picture. The segments in which Caterpillar operates are:

1. Construction Industry Machines
2. Engines
3. Financing and Insurance
4. Machinery
5. Resource Industries

Let us take up each of the segment individually and compare the performance.

  

• Construction Industry Machines - The market share of Caterpillar had declined in the previous years, however the last year i.e. a increase in the market share was seen in this segment and its competitors were not able to maintain their market share which lead to a drop in it. Taking the 3rd Quarter 2018 numbers we can see that Caterpillar market share rose to 35% approx and the other competitors combined together garnered a market share of 65%.

• Engines - The market share has improved compared to last year same quarter and the numbers currently stand at Caterpillar Inc having a market share of around 39.5% and the other competitors together hold around 60.5%.

• Financing and Insurance - Compared to the other segment this segment has a low share of revenue and has not been able to gather much market share. The division of the market share in this segment is around 5% approx and 95% for its competitors.

• Machinery- This is one of the main segments of business of the company, hence it still holds a large market share in the market and has not seen a drop in this segment compared to others. It holds around 95% market share and the competitors add up to the remaining 5%.

• Resource Industries- There has been a lot of sluggishness in this segment due to which the company has been loosing market share and has around 6% market share approximately, while its peers hold the remaining 94% market share.