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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