Case Study:
Companies for your comparative analysis: Caterpillar Inc. and Deere & Company
SITUATION
You are a financial analyst with HTC Corporation. HTC is an established investment banker which services an international market. A client has determined that it wants to invest $2.3 billion in either Deere & Co. or Caterpillar stock (real publicly-traded companies). Which of these companies' shares is the best potential candidate for a long-term commitment? Both targeted companies are competitively favorable. However, based on some serious general and economic concerns about the fallout of companies in the industry in general, the CEO of the client-company has asked your CFO to conduct a financial analysis of both CAT and DE to determine if it is prudent to commit to either company. The cost of this investment is significant and any interruption in cash flow from the investment during the next few years would adversely affect the client's performance and profit. The CFO has given you the job of conducting this analysis. Specifically, the question is: will a commitment to invest in either Caterpillar or John Deere be financially viable over the next two to three years?
YOUR SPECIFIC ASSIGNMENT
Your specific assignment is to research, analyze, and prepare a report for the CFO on the actual financial performance of both DE and CAT for the most recent three years. In addition to reviewing the traditional financial performance indicators, you are also to review both targed companies past and current stock performance for the last one year. Your report is to consist of three parts:
(1) An evaluation of financial performance for the last three years, for both companies.
(2) An evaluation of stock performance for the last one year, for both companies.
(3) Finally, a specific recommendation, with supporting rationale, as to whether or not either targeted company's recent trend in financial and stock performance is of sufficient financial strength to warrant entering into a long-term commitment.
To assist you in your task, the CFO has provided the following general guidance. Since it is recognized that the industry is undergoing a major contraction in selected markets, it is very important to comparatively evaluate both CAT and DE relative to financial and stock performance trends against its Industry.
IMPORTANT: You must include all necessary and relevant financial performance and stock information, trends, and projections in supporting your recommendation. These factors must include, financial ratio trends and industry comparatives, capital spending, stock growth, Beta values, credit rating service valuations, bond rating valuations, and management and investment reports - when these documents are available.
REPORT REQUIREMENTS
YOUR SPECIFIC ASSIGNMENT
Research and analyze the following information for both Caterpillar and Deere:
Annual Balance Sheets for the last three years.
The Income Statements for the last three years.
Annual reports, 10K or 10Q
Industry data
Analysts' reports on performance
Management reports or press releases
Using this information the students have to develop evaluation of the financial performance for both targeted companies:
1. Background and Industry (oneshortparagraph).
2. Select of most significant financial performance results for the companies: Compare Revenue, net income, working capital, total assets for the last three years and other results of your choice of the companies against the industry. Present the table with this information in your report. Write about 1 page of the analysis of these financial performance results.
3. Find financial ratios for each company and the industry in the Internet. Write about 1 to 2 pages of analysis of the ratio results you received.
4. Compare the ratio results for each company against the other, and the industry.
5. Prepare a DuPont analysis for three years. Compare the each company's results to each other and to the industry.
6. Taking the information from the Income statements and the Balance sheets, calculate each company's return on equity using the DuPont technique for the company for three years. Follow general formulas for such analysis. Show and discuss your calculation!
7. Write about 1 page of analysis of the results that you received. Compare the results. If you think the management of Caterpillar and John Deere would like to improve their return on equity, what should the management of these companies do?
8. Evaluate other areas of financial analysis: capital spending, stock growth, Beta values, credit rating service valuations (if possible), bond rating valuations (if possible), etc. Make an overall conclusion about financial performance of each company during the last years. Compare the results that you received against each company and the industry. Summarize the results that you received in 1 pages. What are these firm's financial strengths and weaknesses?
9. Collect and evaluate the data about stock performance of these assigned companies for the last one year. Compare the results that you received against the industry.
10. Write about 1 page of analysis of the ratio results you received. Develop a specific recommendation, with supporting rationale, as to whether or not the assigned company's recent trend in financial and stock performance is of sufficient financial strength to warrant entering into a long-term commitment. (about 1 page)