Caterpillar Inc.: The Bear Case for 2016

Source: Cummins

Deepening global crisis#1

Significant exposure to global markets

North America

EAME

Latin America

Asia-Pacific

More than half of Caterpillar’s sales originate outside North America.

Caterpillar’s 2015 machinery sales by region. Chart by author

The troubling signsBrazil: Barclays slashed its 2016 growth outlook to

a negative 3.1% some weeks ago.China: Industrial production grew only 5.4% -- the

slowest rate since 2008 -- during the first two months of the year.

Europe: The European Central Bank recently cut its 2016 growth forecast to 1.4% from 1.7%.

Russia: Fitch expects the economy to shrink 1.5% in 2016 versus a growth of 0.5% projected earlier.

Pullbacks in high-potential markets like Brazil and China

could prove a major deterrent to Caterpillar’s growth in the near

future.

Going forward

Weakening industrial demand#2

Every segment facing challengesEnergy & transportation: Orders for CAT’s oil drilling

and well-servicing equipment slumped 90% in 2015.Resource industries: Sales fell 15% in 2015.

Management recently confirmed that it is receiving “very few” orders for mining equipment.

Construction industries: CAT’s sales dropped 14% in 2015, with sales from Latin America falling 41%. Peer Manitowoc Cranes doesn’t foresee any improvement in the global construction markets this year.

Depleting backlog: a yellow flag

Caterpillar’s total backlog value declined 25% to $13 billion in 2015. It could deplete further, given the sluggish demand from key end markets.

Source: Caterpillar’s Presentation at Barclays Investor Conference, February 2016

Until the commodities markets recover and miners and energy

companies start spending again, Caterpillar will find it hard to sell

its equipment.

Going forward

Currency: a huge challenge#3

Pressure on the top line

Source: Caterpillar’s Annual Report 2015

Why Caterpillar’s revenue declined 15% in 2015

How it hurts CaterpillarA stronger U.S. dollar means lower

international revenues when converted.CAT’s total sales fell 15% in 2015, with

currency headwinds accounting for 20% of the decline.

Construction industries was the worst hit: Currency fluctuations caused nearly 28% of the decline in the segment sales.

If the dollar continues to rise, Caterpillar’s revenue --

especially from Europe, Asia, and Brazil -- could come under

tremendous pressure.

Going forward

So should you buy Caterpillar now?

2016 will likely be another tough year for Caterpillar, with the company guiding

lower for its first quarter and analysts projecting its full-year earnings to drop 22%. With no signs of a turnaround yet and challenges aplenty, investors may want to stay on the sidelines for now.

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