Caterpillar, a good example of an undervalued Industrial stock

A good example of the undervalued Industrial Sector (see below) is Caterpillar (CAT $87) -

As with any cyclical company (and CAT is very), any useful valuation analysis will start with a calculation of what 'normalized' earnings are, based on past and estimated earnings.  The normalized earnings are calculated using the RoE without the benefit of future knowledge with the exception of including the estimated earnings.

This graph shows the EPS including estimates as well as the normalized MPEPS (green dots). This model discounts for cyclical change but cannot predict secular change.

This graph shows the history of CAT's relative Payback using normalized earnings.  In the last 25 years, CAT has traded between 75 and 125% of the market's Payback.

This graph shows the calculated price range vs the actual Hi Lo Close on an annual basis.  The projected price range for 2014 leaves the stock undervalued by  70%