Michael Burry

Caterpillar

NYSE:CAT

2000-2001

Industry: Engineering Equipment

Category: Accounting/Cyclical

Domestic construction is slowing down.

Everyone knows that domestic construction is slowing down. I don't care.

A hyptothetical company will grow 15% for 10 years and 5% for the remaining life.

If cost of capital in the long term is higher than 5%, than the life of the company is finite and an intrinsic value can be approximated.

If cost of capital is 9%, starting at Y1 earnings at $275, the present value of earnings over 10 years is $3,731.

If cost of capital remains at 9%, the present value from Y10 to demise is $12,324.

What should strike the intelligent investor is that 76.8% of the true intrinsic value of the company today is in the company's earnings after 10 years from now.

To look at it another way, just 5.7% of the company's intrinsic value is represneted by its earnings over the next 3 years.

This implies the company must continue to operate for a very long time.

Caterpillar can do this.

Cash return on capital adjusted from financial operations is 15% over its past cycles, with return on equity averaging 27% over the last 10 years.

Management is conservative by nature.

Caterpillar is the #1 player in electricity generators, generator sales growing 20% over the past 5 years, is up 75% in 2000, and expects sales to triple to 6b in 6 years, or 20% of sales.

The company is quite diverse and outlook is bright.

Burry excludes the debt from the financing operations here, similar to the Paccar example.

Therefore, Caterpillar's enterprise value is selling only 11x FCF.

Burry recommended the shares at $8/sh in Aug 2000.

The share price was $14/sh in 1Y, $14/sh in 3Y, and $50/sh in 5Y.

Sell date is unknown, but the lowest CAGR here is the 3Y, so I will conservatively say this is a 25% CAGR.