Among major U.S. corporations, few have had the bad luck that Caterpillar (CAT 0.38%) has endured in recent years. The heavy-equipment maker has seen all of its major segments suffer setbacks as the construction, infrastructure, mining, and energy industries have all taken big hits in succession. Those conditions have led Caterpillar's customers to pull back on capital spending, and that, in turn, has contributed to the equipment manufacturer's 25% drop in its stock price in 2015.
Nevertheless, Caterpillar has taken steps to prepare for an eventual turnaround, and it now has to hope that conditions will improve enough in its key markets during the next year to lift its shares back upward. Let's take a closer look at whether 2016 could be Caterpillar's best year yet.
Will commodities markets turn?
One key driver for Caterpillar in 2016 is whether key commodity markets -- like crude oil, natural gas, copper and other base metals, and precious metals like gold and silver -- recover from their recent slumps. For now, price forecasts for commodities appear to be cautiously optimistic.
Most industry analysts expect gold to remain under pressure in the first half of 2016, but a potential rebound by the end of the year could give the yellow metal its first annual gain since 2012. On the oil front, Saudi Arabia has prepared its 2016 budget on the assumption that crude will fetch less than $30 per barrel according to reports, yet futures still expect prices to be in the mid-$40s by December. In just the past week, natural gas prices have jumped by nearly a third, as unusually warm fall weather gave way to more normal winter conditions in key parts of the U.S. Copper prices have also bounced back recently.
Cash-strapped producers of commodities need further rebounds in order to get their balance sheets back in shape, but signs of stabilization are nevertheless a step in the right direction. If positive trends can persist, then they could help bring Caterpillar's customers back, and push the heavy-equipment maker's share price higher.
Starting from a low base
Value investors always like stocks that have been down for a long time, and Caterpillar will likely finish 2015 with its worst performance since the financial crisis, and at its worst levels since 2010. Still, that doesn't mean that the worst is over for the company.
As Director of Investor Relations Richard Moore said at a recent conference, Caterpillar is poised to have the fourth-consecutive down year in sales for the first time in its history next year, and even he wasn't willing to say necessarily that 2016 would represent the trough of the business cycle for the equipment maker. Moreover, many of the factors that Caterpillar has cited in finding long-term success are out of its control, as Moore believes that supply issues, like how OPEC deals with its crude-oil production, will be a vital part in determining whether Caterpillar's customers will be in a better position in the future.
That said, the fact that Caterpillar has seen its stock lose ground during the past five years during one of the strongest bull markets in history for the broader stock market makes many think that a turnaround could lift the company's shares substantially. Caterpillar has put cost-control measures into place that should boost profits during the next upward phase of the business cycle, and shareholders hope that those gains come sooner rather than later.
Competition will be fierce
Finally, Caterpillar will have to deal with strong competition. Even if energy rebounds, for instance, conglomerate giant General Electric (GE -1.54%) will be looking to capitalize on the situation in an attempt to gain market share for its power generation, energy delivery, and related equipment. With General Electric continuing to move forward to reestablish itself as a true industrial company by further divesting itself of exposure to the financial industry, Caterpillar will have to fend off General Electric's efforts, and hang onto its existing customer relationships.
Caterpillar has struggled for years, and shareholders are growing impatient with the company. Yet 2016 won't necessarily bring relief for Caterpillar, especially if current downbeat forecasts that will hurt its customer base turn out to be true.