November 9 2021

Industrials and Staples Team

Jimmy Clayton - Chief Investment Officer

James Swiggett - US Economist

Sean Mullen - Performance Analyst

Investment Thesis & Overview

Revenue Breakdown & Financial Highlights

Catalysts

Competitor Analysis

Valuation

Investment Thesis & Overview

Revenue Breakdown & Financial Highlights

Catalysts

Competitor Analysis

Valuation

Investment Thesis

Severely outdated equipment across mining

Infrastructure plan under Biden administration

Strong exposure to Chinese economic stimulus

Company Overview

Construction Resources Energy & Trans. Financial Services

Revenue Breakdown & Financial Highlights

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Segment Profit ($M)

● 52 Week High $200

● 52 Week Low 87.50

● CAT has increased its dividend for 27 consecutive years

● Ending cash balance of $9.4 billion for 2020

● Paid dividends of $2.2 billion

Sales & Revenue

$11.2B(15%)

Profit Per Share

$1.42(28%)

Operating Profit Margin

12.3% (1.8 Points)

Stock Price PerformanceFinancial Highlights

Q4 Y-o-Y Updates

Revenue Breakdown by Geography

● CAT has developed a global supply chain and have relationship disclosures in 39 countries and a dealer network that expands to 193 countries.

● 300 Suppliers and 68 Customers

● 43.6% of revenue is in North America

● 24.5% of revenue is in Asia/Pacific

● 23.6% of revenue is in EAME

● 8.2% of revenue is in Latin America

Global Diversification

2021 Forecast Mining

● Mining is poised to increase 7% in 2021.

● Mining Capex is projected to rise to highest levels since 2015.

● CAT resources industry (mining) is projected to increase 12% in 2021 following a 23% decline in 2020.

● Mining fleets are oldest on record which support support growth in CAT’s Resources Industry

Mining Revenue ($m)

2021 Forecast Infrastructure

● Potential $2 Trillion infrastructure plan could be a $60 - $80 billion revenue opportunity ($167 billion spent in 2019)

● 5-6 cents for every dollar spent on infrastructure goes toward construction equipment

● Sourcewell provides the best cooperative contracts for the government to acquire machinery

U.S Public Construction Spending % of GDP

US Infrastructure Spending

China

From CAT’s most recent filing:

Chinese Infrastructure Spending

● China spends more on public infrastructure investments per year than the US and Western Europe combined

● Oxford’s Said Business School projects the country could reach $28T in infrastructure spending by 2040

● China uses infrastructure spending (especially during the pandemic) to maximize short-run employment and sustain their consistently high reported GDP growth

Competitor Analysis

● P/E - 20.2x

● ROE - 6.1%

● MKT $2.7B

● 2019 Revenue:$4.4B

● P/E - 23.6X

● ROE - 3.8%

● MKT $1.47B

● 2019 Revenue:$1.2B

● P/E - 29.1x

● ROE - 3.8%

● MKT $504m

● 2019 Revenue: $1.8B

● P/E - 22.8x

● ROE - 22.6%

● MKT $99.3B

● 2019 Revenue: $39.3B

DCF Analysis

Investment Thesis

Diverse portfolio of products

Global revenue exposure

Undervalued relative to key competition

Unique product economics

Company Overview

● Total of 21 Brands that each generate more than $1 billion in annual retail sales

● Customers in more than 200 countries

● Expanding and finding new partnerships - PLANeT Partnership with Beyond Meat

○ Develop snack and beverage products that will use plant-based protein

Pepsico Overview

Revenue Breakdown & Financial Highlights

Stock Performance

Revenue - Supplementary Break Down Adjusted Revenue

Dividend Per Share

Product Segments and Geography

Global Diversification

● 57% of revenue is domestic

● 23% comes from 6 other major population centers

● 20% from another ~190 countries worldwide

○ Exposure to growth in discretionary income and economic activity in EMs

● ~25% of revenues currently come from outside the US and Europe

Revenue by Geography Revenue by Division/Segment

Junk Food Economics

Inferior or Normal Good?

● In economics, an inferior good is one that sees demand increase with a loss of income due to its relative cheapness (ex. Ramen)

● Products like Pepsi’s exhibit hybrid economic behavior, possibly a hedge against macro and microeconomic volatility

● Some studies show junk food performing as an inferior good in developed economies and a normal good in emerging ones

○ Competing literature suggests that junk food can act as a normal good in the United States as well

Change in US Income vs. Pepsi Revenue

Competitor Analysis

Keurig Dr PepperMonster BeverageCoca-Cola

● $213.4B Market Capitalization

● 2019 Revenue: $37.3B

● P/E: 23.5x

● Products sold in over 200 countries, only beverages

● $48.1B Market Capitalization

● 2019 Revenue: $4.2B

● P/E: 34.1x

● ~72% of sales from US & Canada

● $45.8B Market Capitalization

● 2019 Revenue: $11.1B

● P/E: 20.1x

● ~89% of sales from US, emphasis on coffee products

Strong Relative Value

$141

DCF Analysis

Buy

Recommendation

Open to selling GD to free up cash if necessary

Appendix