Caterpillar Inc.: Machinery Sales Steady, Engines Weak But Stabilizing

North America Equity Research
21 September 2009
Caterpillar Inc.
Machinery Sales Steady, Engines Weak But Stabilizing
WW Machinery sales were down 48% in August09 vs. down 48% in July09. This morning, CAT released its retail sales data for the three-month rolling period ending August09. The three-month rolling YoY worldwide sales growth for Machinery (including CAT Japan) was -48% (vs. -48% in July09 and -47% in June09), as sales continued to deteriorate in Latin America, and Asia, stabilized in EAME, and improved slightly in NA. Machinery sales trends continued to stabilize at a low level in EAME and NA in August09. NA machinery sales were weak YoY but improved slightly from July, down 57% in August09 (vs. -59% in July09 and -18% YA). EAME sales remained stable, down 50% (vs. -50% in July09 and down 2% YA). Latin America registered another month of sharp decline, down 37% in August (vs. -28% in July09 and +23% YA). Asia/Pacific (including CAT Japan) sales continued to deteriorate in August09, down 33% (vs. -30% in July09 and +17% YA). WW Engine sales were down 27% in August09 vs. down 33% in July09. The three-month rolling YoY growth for worldwide retail engine sales decreased 27% in August09 (vs. -33% in July09 and +8% YA). Overall engine sales were up driven by Electric Power, Truck & Bus, and Petroleum. Electric Power was -21% (vs. -29% in July09 and +9% YA). Truck & Bus was -69% (vs. -72% in July'09 and +4% YA). Petroleum was -25% (vs. -28% in July'09 and +13% YA). Marine, which tends to be lumpy, was +13% in August09 (vs. +1% in July'09 and -9% YA). Industrial remained weak at -47% (vs. -46% in July'09 and +8% YA). Key Takeaways. WW Engine sales were down 27% YoY in August, but showed signs of sequential stabilization, driven by improvement in Electric Power, Truck & Bus, Petroleum, and Marine (which tends to be lumpy). Of note, Turbines alone represented 53% of Q2 EBIT. Electric Power, Truck & Bus, and Petroleum engine sales improved modestly on a sequential basis. Machinery sales continued to remain weak overall. NA and EAME seem to have stabilized. However, Latin America and Asia/Pacific machinery sales continued to deteriorate, and comparables for these markets remain tough over the next several months. CAT's early cycle businesses are showing signs of stabilization at low levels while late cycle businesses continue to be volatile.
Overweight
CAT, CAT US Price: $53.42 Price Target: $43.00
U.S. Machinery Ann Duignan

AC
(1-212) 622-0381 ann.duignan@jpmorgan.com
Rahul Chadha
(1-212) 622-3549 rahul.x.chadha@jpmorgan.com J.P. Morgan Securities Inc.
Price Performance
60 $ 40 20
Sep-08 Dec-08 Mar-09 Jun-09 Sep-09
YTD Abs 19.6%
1m 18.4%
3m 56.7%
12m -18.2%
Caterpillar Inc. (CAT;CAT US) 2008A EPS - Recurring ($) Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec) FY CY
Source: Company data, Reuters, J.P. Morgan estimates.
2009E 0.39A 0.72A 0.03A 0.53A 1.66A
2010E
1.45 1.74 1.39 0.34 4.91
2.20
Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ bn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date
53.42 18 Sep 09 66.82 - 21.72 33.17 Dec 621 43.00 31 Dec 09
See page 9 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Ann Duignan (1-212) 622-0381 ann.duignan@jpmorgan.com
North America Equity Research 21 September 2009
Machinery
WW Machinery sales were down 48% in August09 vs. down 48% in July09. This morning, CAT released its retail sales data for the three-month rolling period ending August09. The three-month rolling YoY worldwide sales growth for Machinery (including CAT Japan) was -48% (vs. -48% in July09 and -47% in June09), as sales continued to deteriorate in Latin America, and Asia, stabilized in EAME, and improved slightly in NA. Machinery sales trends continued to stabilize at a low level in EAME and NA in August09. NA machinery sales were weak YoY but improved slightly from July, -57% in August09 (vs. -59% in July09 and -18% YA). EAME sales remained stable, -50% in August (vs. -50% in July09 and down 2% YA). Latin America registered another month of sharp decline, -37% in August (vs. -28% in July09 and +23% YA). Asia/Pacific (including CAT Japan) sales continued to deteriorate in August09, -33% (vs. -30% in July09 and +17% YA).
Figure 1: Worldwide Dealer Reported Retail Machinery Sales
50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60%
Note: Includes CAT Japan beginning in January 2008. Source: Company reports, J.P. Morgan.
CAT Dealer Reported Retail Machinery Sales Worldwide 3MMA
Dec-02 Feb-03 Apr-03 Jun-03 Aug-03 Oct-03 Dec-03 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09
Figure 4: Asia/Pacific
Figure 2: North America
-30% 10% 20% 30%
-20%
-10%
-80%
-60%
-40%
-20%
20%
40%
60%
0%
0%
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09
Source: Company reports, J.P. Morgan

CAT Dealer Reported Retail Machinery Sales Asia/Pacific 3MMA (including CAT Japan)
-60% -50% -40% -30% -20% -10% 10% 20% 30% 40% 50% 0%

CAT Dealer Reported Retail Machinery Sales North America 3MMA
Figure 3: EAME
Figure 5: Latin America
150% 140% 130% 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% CAT Dealer Reported Retail Machinery Sales Latin America 3MMA Dec-02 Feb-03 Apr-03 Jun-03 Aug-03 Oct-03 Dec-03 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09
CAT Dealer Reported Retail Machinery Sales EAME 3MMA
Retail Engine Sales

WW Engine sales were down 27% in August09 vs. down 33% in July09. The three-month rolling YoY growth for worldwide retail engine sales decreased 27% in August09 (vs. -33% in July09 and +8% YA). Overall engine sales were up driven by Electric Power, Truck & Bus, and Petroleum. Electric Power was -21% (vs. -29% in July09 and +9% YA). Truck & Bus was -69% (vs. -72% in July'09 and +4% YA). Petroleum was -25% (vs. -28% in July'09 and +13% YA). Marine, which tends to be lumpy, was +13% in August09 (vs. +1% in July'09 and -9% YA). Industrial remained weak at -47% (vs. -46% in July'09 and +8% YA).
Figure 6: Worldwide Retail/OEM Engine Sales
40% 30% 20% 10% 0% -10% -20% -30% -40%
CAT Retail/OEM Engine Sales Total 3MMA
-90% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0%
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
Figure 9: Industrial
Figure 7: Truck & Bus
-60% 10% 20% 30% 0%

CAT Retail/OEM Engine Sales Truck & Bus 3MMA CAT Retail/OEM Engine Sales Industrial 3MMA
-50%
-40%
-30%
-20%
-10%

-30% 10% 20% 30% 40% 50% 60% 0% -20% -10%

Dec-02 Feb-03 Apr-03 Jun-03 Aug-03 Oct-03 Dec-03 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 -30% -20% -10% 10% 0% 20% 30% 40% 50% 60%
Figure 10: Marine
Figure 8: Electric Power

CAT Retail/OEM Engine Sales Marine 3MMA
CAT Retail/OEM Engine Sales Electric Power 3MMA
Retail Sales Vs. Reported Revenue

In the Machinery segment, we are currently forecasting revenues to be -48.9% YoY in Q309 vs. Augusts retail sales on a rolling three month YoY growth of -48%. In the Engine segment, we are currently forecasting Q309 revenues to be -22.7% versus Augusts retail/OEM sales on a rolling three month YoY growth of -27%.
Figure 11: Reported Machinery Sales Vs. CAT Machinery Revenue
CAT Machinery Retail Sales & Revenue YoY Growth 60% 50% 40% 30% 20% 20% 10% 0% 0% -20% -10% -20% -40% -30% -60% 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09E -40% 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09E
Figure 12: Reported Engine Sales Vs. CAT Engine Revenue

CAT Engines Retail/OEM Sales & Revenue - YoY Growth
40%
Revenue Growth
Retail Sales Growth
Revenue Growth
Retail/OEM Sales Growth
Valuation and Rating Analysis

We are maintaining our Overweight rating on CAT. Historically, CATs forward P/E has troughed around 10x on peak forward earnings estimates and peaked around 20x on trough forward earnings estimates. At an intraday price of $52.27, CAT is trading at 31.5x our 2009 EPS estimate of $1.66, and 23.8x our 2010 EPS estimate of $2.20, toward the high-end of the historical range. We are maintaining our Overweight rating, as well as our 2009 year-end price target of $43. Given CATs solid Q209 operating performance and signs of a trough in macro data, we believe investors should be willing to value CAT based on its normalized earnings power going forward. Our $43 year end price target is based on our belief that, at year end 2011, investors should be willing to pay a mid-cycle multiple of 15x our estimated FY12E normalized EPS of $3.80. Discounting back to year-end 2009 yields a price target of $43.
Risks to Our Rating

Downside risks. Given persistent end market weakness, we believe CAT could experience an extended period of weaker-than-expected earnings, and our 2010 EPS estimate may be at risk. In CATs Machinery segment, EAME appears to be stabilizing, but NA and Asia/Pacific continue to post sequential declines, with no definitive signs of a bottom yet. In Engines, Electric Power and Petroleum have fallen sharply and pose a risk to our current estimates.
Figure 13: CAT Relative Price-to-Normalized Earnings

CAT - Relative P/NE FY1 1.30 1.20 1.10 1.00 0.90 0.80 0.70 0.60 Jan-93 Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10
Figure 14: CAT Revision Indicator

CAT Revision Indicator - Trailing 3M Avg 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% 1/1/1993 7/1/1993 1/1/1994 7/1/1994 1/1/1995 7/1/1995 1/1/1996 7/1/1996 1/1/1997 7/1/1997 1/1/1998 7/1/1998 1/1/1999 7/1/1999 1/1/2000 7/1/2000 1/1/2001 7/1/2001 1/1/2002 7/1/2002 1/1/2003 7/1/2003 1/1/2004 7/1/2004 1/1/2005 7/1/2005 1/1/2006 7/1/2006 1/1/2007 7/1/2007 1/1/2008 7/1/2008 1/1/2009 7/1/2009 1/1/2010 Trailing 3M Avg Revision Indicator Average +1 STD -1 STD
Rel Price to Norm FY1
Average
+ 1 STD
-1 STD
Source: Company reports and J.P. Morgan estimates.
Source: Company reports and J.P. Morgan estimates.
Table 1: CAT Income Statement

Income Statement
$ in millions (except per share data)
Q1'08
Mar-08
Q2'08
Jun-08
Q3'08
Sep-08
Q4'08
Dec-08
2008
Dec-08
Q1'09
Mar-09
Q2'09 Q3'09E Q4'09E

Jun-09 Sep-09 Dec-09
2009E
Dec-09
2010E
Dec-10
Machinery & Engines (w Financial Services on Equity Basis) Machinery (including CAT Japan -- SCM) Engines Total Equipment Sales
YoY Growth
7,548 3,431 10,979

17.8%
8,530 4,267 12,797

20.6%
8,051 4,097 12,148

13.9%
7,675 4,445 12,120

6.7%
31,804 16,240 48,044

14.5%
5,342 3,168 8,510

-22.5%
4,338 2,916 7,254

-43.3%
4,110 3,165 7,275

-40.1%
5,867 3,796 9,663

-20.3%
19,657 13,046 32,703

-31.9%
18,771 11,463 30,234

(7.6%)
Cost of Goods Sold

% of Sales
8,609
78.4%
10,036
78.4%
9,704
79.9%
10,066
83.1%
38,415
80.0%
7,027
82.6%
5,752
79.3%
6,032
82.9%
8,151
84.4%
26,962
82.4%
23,441
77.5%
Gross Income SG&A

% of Sales YoY Growth
2,370 832
7.6% 6.0%
2,761 925
7.2% 8.4%
2,444 924
7.6% 11.2%
2,054 1,131
9.3% 27.5%
9,629 3,812
7.9% 13.6%
1,483 760
8.9% -8.7%
1,502 789
10.9% -14.7%
1,244 760
10.4% -17.7%
1,512 780
8.1% -31.0%
5,741 3,089
9.4% -19.0%
6,793 3,200
10.6% 3.6%
R&D
% of Sales YoY Growth
369
3.4% 8.5%
415
3.2% 18.6%
437
3.6% 22.4%
507
4.2% 42.0%
1,728
3.6% 23.1%
388
4.6% 5.1%
351
4.8% -15.4%
350
4.8% -19.9%
341
3.5% -32.7%
1,430
4.4% -17.2%
1,450
4.8% 1.4%
Other Operating Expense Operating Profit

EBIT margin EBIT YoY growth Incremental/Decremental EBIT margin
(11) 1,180
10.7% 10.9% 7.0%
(9) 1,430
11.2% 27.7% 14.2%
3 1,080
8.9% -10.7% -8.8%
(16) 432
3.6% -63.7% -99.7%
(33) 4,122
8.6% -10.1% -7.6%
(2) 337
4.0% -71.4% 34.1%
(26) 388
5.3% -72.9% 18.8%
(2) 136
1.9% -87.4% 19.4%
(2) 393
4.1% -8.9% 1.6%
(33) 1,255
3.8% -69.6% 18.7%
(25) 2,168
7.2% 72.8% -37.0%
Other Income (Expense) Net Interest Expense Profit Before Taxes -- Machinery & Engines Income Taxes
Implied tax rate
16 74 1,122 350
31.2%
(18) 70 1,342 386

28.8%
63 59 1,084 353
32.6%
19 67 384 189
49.2%
80 270 3,932 1,278

32.5%
34 114 257 100

38.9%
97 139 346 19
5.5%
20 117 39 12
31.5%
20 116 298 94
31.5%
171 486 940 225

24.0%
80 384 1,864 587

31.5%
Net Income -- Machinery & Engines

Equipment net margin
772
7.0%
956
7.5%
731
6.0%
195
1.6%
2,654
5.5%
157
1.8%
327
4.5%
27
0.4%
204
2.1%
715
2.2%
1,277
4.2%
Equity in profit (loss) of unconsolidated affiliated companie Equity profit of Financial Products' subsidiaries
Less: Profit/(loss) due to noncontrolling interests (CAT Japan/SCM)
11 139 922 912 817 134

14.7%
10 140 1,106 910 827 154

16.9%
12 125 868 897 833 142

15.8%
5 5 205 869 803 186

21.4%
38 409 3,101 3,588 3,280 616

17.2%
Net Income Financial Products Revenues - Non Consolidated Revenues -Consolidated SG&A
% of Sales
1 56 (23) 237 796 715 125

15.7%
(1) 102 (15) 443 814 721 129

15.8%
(8) (21) (20) 18 655 546 132

20.2%
(8) 112 (20) 328 870 676 145

16.7%
(17) 250 (78) 1,026 3,134 2,658 531

16.9%
(17) 103 0 1,363 2,721 2,419 490

18.0%
Net Interest Expense

% of sales
286
31.4%
279
30.7%
292
32.6%
305
35.1%
1,162
32.4%
282
35.4%
272
33.4%
290
44.3%
290
33.3%
1,134
36.2%
1,100
40.4%
Other Operating Expense

% of sales
297
32.6%
311
34.2%
319
35.6%
304
35.0%
1,231
34.3%
280
35.2%
286
35.1%
270
41.3%
278
32.0%
1,114
35.5%
1,000
36.8%
Operating Profit Other Income Profit Before Taxes - Financial Products Income Taxes
Tax Rate
195 14 209 70
33.5%
166 22 188 48
25.5%
144 24 168 42
25.0%
74 (98) (24) (29)

120.8%
579 (38) 541 131

24.2%
109 (20) 89 29
32.6%
127 13 140 34
24.3%
(37) 13 (24) (8)

31.5%
157 13 170 53
31.5%
355 19 374 109

29.0%
131 19 150 47
31.5%
Profit of Consolidated Companies

Financial Products net margin Equity in profit (loss) of unconsolidated affiliated companies Less: Profit/(loss) due to noncontrolling interests (CAT Japan/SCM)
139
15.2%
140
15.4%
126
14.0%
5
0.6%
410
11.4%
60
7.5%
106
13.0%
(17)
-2.5%
116
13.4%
266
8.5%
103
3.8%
0 139 11,796
17.8%
0 140 13,624
20.0%
(1) 125 12,981

13.5%
0 5 12,923
6.4%
(1) 409 51,324

14.2%
Profit Consolidated Total Sales and Revenues

YoY growth
0 4 56 9,225
-21.8%
0 4 102 7,975
-41.5%
4 (21) 7,821
-39.7%
4 112 10,340
-20.0%
0 16 250 35,361
-31.1%
0 103 32,652
-7.7%
Consolidated EBIT Consolidated Profit Before Taxes Income Taxes

Effective Tax Rate
1,375 1,331 420

31.6%
1,596 1,530 434

28.4%
1,224 1,252 395

31.5%
506 360 160

44.4%
4,701 4,473 1,409

31.5%
446 346 129

37.3%
515 486 53
10.9%
99 15 5
31.6%
550 467 147

31.5%
1,610 1,314 334

25.4%
2,299 2,014 634

31.5%
Profit of Consolidated Companies Equity in Profit of Unconsolidated Affiliates

Less: Profit/(loss) due to noncontrolling interests (CAT Japan/SCM)
911 11 922
7.8%
1,096 10 1,106
8.1%
857 11 868
6.7%
200 5 205
1.6%
Net Income
Net margin
3,064 37 0 3,101
6.0%
217 1 (19) 237

2.6%
433 (1) (11) 443

5.6%
10 (8) (16) 18
0.2%
320 (8) (16) 328

3.2%
980 (17) (62) 1,026

2.9%
1,380 (17) 0 1,363

4.2%
Net Income to Common -- Continuing Redundancy expenses Discrete tax benefit Total Non-Recurring Items Discontinued Items -- Net of Tax Extraordinary Items -- Net of Tax Net Income -- Reported Diluted EPS -- Continuing Non-Recurring Items Discontinued Items -- Net of Tax Extraordinary Items -- Net of Tax Diluted EPS -- Reported
YoY Growth Continuing
922
1,106
868
205 456 456 0 0 661 $0.34 $0.75 $0.00 $0.00 $1.08

-78%
3,101 456 456 0 0 3,557 $4.91 $0.75 $0.00 $0.00 $5.66

-9%
237 (349)
443 (72)
18 (19)
328 0 0 0 0 328 $0.53 $0.00 $0.00 $0.00 $0.53

57%
0 0 0 922 $1.45 $0.00 $0.00 $0.00 $1.45

18%
0 0 0 1,106 $1.74 $0.00 $0.00 $0.00 $1.74

40%
0 0 0 868 $1.39 $0.00 $0.00 $0.00 $1.39

-1%
(349) (72) (19) 0 0 0 0 0 0 (112) 371 (1) $0.39 $0.72 $0.03 ($0.58) ($0.12) ($0.03) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 ($0.19) $0.60 ($0.00)
-73% -59% -98%
1,026 (440) 0 (440) 0 0 586 $1.66 ($0.73) $0.00 $0.00 $0.94

-66%
1,363 0 0 0 0 1,363 $2.20 $0.00 $0.00 $0.00 $2.20

33%
Avg Shares Outstanding -- Basic Avg Shares Outstanding -- Diluted Dividends Payout ratio Segment Details Operating Profits Machinery Engines CAT Japan -- SCM Total Operating Margins Machinery (including CAT Japan -- SCM) Engines Total Equipment Operating Leverage Machinery (including CAT Japan -- SCM) Engines Total Machines & Engines
617.5 637.9 $0.36 25%
614.3 635.5 $0.36 21%
607.0 624.8 $0.42 30%
602.1 610.6 $0.42 125%
610.5 627.9 $1.56 32%
602.1 602.1 $0.42 107%
611.8 619.8 $0.42 59%
621.3 621.0 $0.42 1446%
621.3 621.0 $0.42 80%
614.1 620.0 $1.68 101% 6.5% (754) 2,005 3 1,255 -3.8% 15.4% 3.8% (0.68) 1.08 0.45
621.3 621.0 $1.68 77% 20% 563 1,605 0 2,168 3.0% 14.0% 7.2% (0.78) 0.91 1.87
626 554 0 1,180 8.3% 16.1% 10.7% 0.75 1.31 0.94
719 711 0 1,430 8.4% 16.7% 11.2% 0.83 1.47 1.06
464 616 0 1,080 5.8% 15.0% 8.9% 0.60 1.01 0.78
(6) 438 0 432 -0.1% 9.9% 3.6% (0.01) 0.67 0.34
1,803 2,319 0 4,122 5.7% 14.3% 8.6% 0.58 1.06 0.79
(153) 490 0 337 -2.9% 15.5% 4.0% (0.35) 0.96 0.37
(178) 566 0 388 -4.1% 19.4% 5.3% (0.49) 1.16 0.48
(247) 380 3 136 -5.9% 12.0% 1.9% (1.04) 0.80 0.21
(176) 569 0 393 -3.0% 15.0% 4.1% 38.38 1.52 1.14
Source: Company Reports, J.P. Morgan.
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.
Important Disclosures
Lead or Co-manager: JPMSI or its affiliates acted as lead or co-manager in a public offering of equity and/or debt securities for Caterpillar Inc. within the past 12 months. Client of the Firm: Caterpillar Inc. is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking services from Caterpillar Inc.. Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next three months from Caterpillar Inc.. Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other than investment banking from Caterpillar Inc.. An affiliate of JPMSI has received compensation in the past 12 months for products or services other than investment banking from Caterpillar Inc..
Caterpillar Inc. (CAT) Price Chart

150 OW $40 125 N 100 Price($) 75 UW OW $94 N $32 N $60 OW $43
Date
25-Jan-07 02-Jun-08 23-Jul-08 27-Jan-09 22-Apr-09 22-Jul-09
Rating Share Price ($)

UW OW N N OW OW 59.73 82.64 74.98 41.78 32.67 31.39 39.46
Price Target ($)

94.00 -60.00 32.00 40.00 43.00
22-Dec-08 N
50
25
0 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09
Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage May 31, 2008 - Jun 02, 2008. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] The analyst or analysts teams coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.
Coverage Universe: Ann Duignan: AGCO Corp. (AGCO), Actuant Corp (ATU), Bucyrus International (BUCY), CNH Global (CNH), Caterpillar Inc. (CAT), Commercial Vehicle Group (CVGI), Cummins Inc (CMI), Deere & Co. (DE), Eaton Corp. (ETN), Illinois Tool Works (ITW), Joy Global (JOYG), Kennametal Inc. (KMT), Manitowoc Co. (MTW), Navistar Int'l (NAV), PACCAR Inc. (PCAR), Parker Hannifin (PH), Terex Corp (TEX)
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J.P. Morgan Equity Research Ratings Distribution, as of June 30, 2009 Overweight (buy) 36% 55% 36% 77% Neutral (hold) 46% 56% 52% 72% Underweight (sell) 18% 42% 12% 60%
JPM Global Equity Research Coverage IB clients* JPMSI Equity Research Coverage IB clients*
*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.
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11

Caterpillar Inc.: Machinery Sales Steady, Engines Weak But Stabilizing

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Caterpillar Inc.: Machinery Sales Steady, Engines Weak But Stabilizing

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North America Equity Research

U.S. Machinery Ann Duignan

(1-212) 622-0381 ann.duignan@jpmorgan.com

YTD Abs 19.6%

2009E 0.39A 0.72A 0.03A 0.53A 1.66A

1.45 1.74 1.39 0.34 4.91

53.42 18 Sep 09 66.82 - 21.72 33.17 Dec 621 43.00 31 Dec 09

See page 9 for analyst certification and important disclosures.

Ann Duignan (1-212) 622-0381 ann.duignan@jpmorgan.com

North America Equity Research 21 September 2009

CAT Dealer Reported Retail Machinery Sales Worldwide 3MMA

Figure 2: North America

Ann Duignan (1-212) 622-0381 ann.duignan@jpmorgan.com

-30% 10% 20% 30%

Source: Company reports, J.P. Morgan

Source: Company reports, J.P. Morgan

North America Equity Research 21 September 2009

Figure 5: Latin America

Source: Company reports, J.P. Morgan

Source: Company reports, J.P. Morgan

CAT Dealer Reported Retail Machinery Sales EAME 3MMA

Ann Duignan (1-212) 622-0381 ann.duignan@jpmorgan.com

North America Equity Research 21 September 2009

Retail Engine Sales

CAT Retail/OEM Engine Sales Total 3MMA

Figure 7: Truck & Bus

Ann Duignan (1-212) 622-0381 ann.duignan@jpmorgan.com

-60% 10% 20% 30% 0%

Source: Company reports, J.P. Morgan

Source: Company reports, J.P. Morgan

North America Equity Research 21 September 2009

Figure 10: Marine

Figure 8: Electric Power

Source: Company reports, J.P. Morgan

Source: Company reports, J.P. Morgan

CAT Retail/OEM Engine Sales Electric Power 3MMA

Ann Duignan (1-212) 622-0381 ann.duignan@jpmorgan.com

North America Equity Research 21 September 2009

Retail Sales Vs. Reported Revenue

Figure 12: Reported Engine Sales Vs. CAT Engine Revenue

Retail Sales Growth

Retail/OEM Sales Growth

Source: Company reports, J.P. Morgan

Source: Company reports, J.P. Morgan

Ann Duignan (1-212) 622-0381 ann.duignan@jpmorgan.com

North America Equity Research 21 September 2009

Valuation and Rating Analysis

Risks to Our Rating

Figure 13: CAT Relative Price-to-Normalized Earnings

Figure 14: CAT Revision Indicator

Rel Price to Norm FY1

Source: Company reports and J.P. Morgan estimates.

Source: Company reports and J.P. Morgan estimates.

Ann Duignan (1-212) 622-0381 ann.duignan@jpmorgan.com

North America Equity Research 21 September 2009

Table 1: CAT Income Statement

Q2'09 Q3'09E Q4'09E

7,548 3,431 10,979

8,530 4,267 12,797

8,051 4,097 12,148

7,675 4,445 12,120

31,804 16,240 48,044