The 3 Biggest Challenges Facing Caterpillar Inc. in 2016

Plunging oil prices

#1 Oil

Source: Caterpillar

The headwind

When referring to the impact of oil prices during one of Caterpillar’s earnings calls, Chairman and CEO Doug Oberhelman mentioned how “low 70s on a sustained basis” would send “a chill across the market.”

With oil now below $30 per barrel, Caterpillar is clearly in trouble.

Why it hurts Caterpillar

Oil & gas is a key contributor to Caterpillar’s energy & transportation, or E&T sales

Source: Caterpillar’s presentation at Baird 2015 Industrial Conference

The impactPast: E&T was Caterpillar’s largest and most

profitable business in 2014, contributing nearly 60% to its total operating profit.

Present: E&T revenue and pre-tax operating profit slumped 13.4% and 16% during the nine months through September, 2015.

Future: Caterpillar expects E&T revenue to decline 5%-10% this year from 2015 levels.

Commodities in the dumps

#2 Commodities

Source: Caterpillar

The headwind

Why it hurts CaterpillarCaterpillar’s resource industries (mining) business suffered a huge

setback as iron ore, copper, and coal tumbled

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Q1 2015

Q2 2015

Q3 2015 $-200

$- $200

$400 $600

$800 $1,000 $1,200 $1,400 $1,600

Segment-wise Quarterly Operating Profit

Resource Industries Energy & Transportation Construction Industries

Ope

ratin

g pr

ofit (

in m

illio

ns)

Data source: Caterpillar financials. Chart by author

The impact Resource industries will likely be the company’s

weakest segment in 2016, with sales expected to decline 10% from 2015 levels

Macquarie projects demand for key commodities to remain “below the 10-year norms” this year

Caterpillar cannot unlock value from its $8.8 billion worth Bucyrus International acquisition until commodities recover

Uncertainty in key

international markets

#3 Global woes

Image Credit: Mark Doliner via Flickr

The headwind

Manufacturing activity in China contracted for the fifth straight month in December, while economic activity in Brazil shrank for the ninth straight month in November. Growth in Europe, meanwhile, remains uncertain.

Why it hurts Caterpillar

More than 50% of Caterpillar’s sales originate outside North America, with China ranking as a key growth market

Geographic distribution of Caterpillar’s 2014 machinery sales. Chart by author

The impact Caterpillar’s sales from Latin America, Asia-Pacific,

and Europe, Asia, Middle East regions slumped 31%, 25%, and 13% year over year, respectively, in Q3.

Slower growth in Brazil and China to offset strength in the U.S. markets this year: Caterpillar expects 2016 revenue to be 5% lower from 2015 levels

Strengthening of the dollar is an added pain, as international sales translate into lower revenue when converted

This $19 trillion industry could destroy the InternetOne bleeding-edge technology is about to put the World Wide Web to bed. And if you act quickly, you could be among the savvy investors who enjoy

the profits from this stunning change. Experts are calling it the single largest business opportunity in the history of capitalism... The Economist is calling it "transformative"... But you'll probably just call it "how I made my millions." Don't be too late to the party -- click here for one stock to own

when the Web goes dark.