Caterpillar Inc.: The Bull Case for 2016
Source: Cummins
Commodities regaining lost luster
#1
A turnaround in key commodity markets would be the biggest driver for Caterpillar in 2016. We’re already seeing positive
trends.
Key commodities have bounced back this year
Why a recovery in metals helps CAT
A slump in metal prices forced miners to slash capital expenditures, hurting Caterpillar’s resource industries (mining equipment) segment.
In 2015, sales from the segment slumped 15% and 36%, respectively, from 2014 and 2013 levels.
Last quarter, Caterpillar projected resource industries’ sales to slip another 15%-20% in 2016.
Why a recovery in oil helps CAT
Plunging oil prices sent demand for Caterpillar’s energy and transportation products plummeting: E&T sales slumped 17% in 2015.
E&T contributed nearly 60% to Caterpillar’s operating profits in 2014. It continues to be the company’s most profitable segment.
Last quarter, Caterpillar projected E&T revenue to decline another 10%-15% in 2016.
Aggressive restructuring underway #2
Caterpillar is striving hard to cut costs to maintain margins and emerge a leaner and stronger
company when business cycles turn.
Latest restructuring move
A CT660 Concrete Mixer. Source: Caterpillar group website www.cat.com
Caterpillar is exiting the on-highway vocational trucks market
Further steps takenAims to cut headcount by 4,000-5,000 between
September 2015 and December 2016. Target: reduce workforce by 10,000 through 2018
Announced consolidation or closure of nine facilities since September, 2015
Expects to lower its total expenses by $900 million in 2016
Caterpillar’s goal: to maintain margins even in poor business conditions
Strong cash flows and financials#3
Caterpillar continues to generate strong flows in a
downturn, thanks to rigid cost control and lower capital
spending.
Cash flows > Net income
Statistics for 2015
Operating cash flow: $6.7 billionFree cash flow: $3.4 billion Cash and cash equivalent: $6.5
billionReturn on equity: 13%
Increasing shareholder returns#4
Caterpillar’s strategy Return extra cash to shareholders
Cash flows supporting dividend
Caterpillar increased its quarterly dividend by 10% and repurchased shares worth $2 billion in 2015.
CAT currently pays out 84% of its profits in the form of dividends.
Management expects to generate enough cash flows this year to cover dividend and capital expenditures.
So should you buy Caterpillar now?
While there are strong reasons to be bullish about Caterpillar, you need to
know the cons of investing in the stock before deciding. Stay tuned for a
detailed analysis of the bear thesis on the company.
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