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Caterpillar, Inc. (NYSE:CAT) seems to be a very popular stock and it is easy to see why, when this company makes some of the coolest earthmoving equipment in the world. Caterpillar equipment is used in many industries which includes construction, farming, mining, heavy infrastructure, and others. Because of this, Caterpillar is dependent on the health of the global economy. While this company has a great brand name and it manufactures very high quality products, it seems that some investors "gloss over" the challenges and potential risks that should be considered more thoroughly. Here is a look at some of these potential risk factors:

1) Caterpillar makes heavy machinery that is often used in the coal industry and in the mining of precious and other metals, such as iron ore. The coal industry is facing major challenges as the price of coal has plunged due to increased use of natural gas by many utilities. Demand for coal and iron ore (which is used to make steel) from China has been weak as well, and this dynamic could persist or even get worse as fears over a property bubble in China linger. With precious metals prices facing a decline recently, expansion plans at many companies might be put on hold and lower demand for mining equipment.

2) Even though the U.S. economy is seeing some bright spots in areas like housing, that may not be enough to outweigh a number of very serious potential challenges that the economy is facing. The United States could easily slip back into a recession, especially as a 2% payroll tax increase that was introduced in January starts to bite into consumer spending. Additionally, the recent "Sequestration" budget cuts could impact a number of major industries and even cause layoffs or work furloughs for certain government employees. The impact of these budget cuts might trickle into the general economy over the next few months.

3) Many global macro economic issues remain and any one of these could create a major financial crisis or a double dip recession. The economy in Europe remains weak and many countries are faced with very high unemployment. Spain and Greece are facing unemployment rates of over 20%, and other countries like France are seeing these numbers trending in the wrong direction. While Europe seemed to be back in control of a debt crisis in recent weeks, election results in Italy has now reminded investors how fragile the current situation remains. The concern is that if Italy votes in the wrong leaders who want to push back against austerity measures, it could lead to a chain of events that causes Italy to leave the European Union and the Euro currency and possibly lead to Spain leaving as well. This type of event could create a financial crisis that is not priced into the market now as the S&P 500 Index (NYSEARCA:SPY) trades near all time highs.

4) Caterpillar has a significant amount of debt on the balance sheet. It has about $3.32 billion in cash and around $40 billion in debt. In a global economic downturn, investors are generally much better off investing in companies that are cash-rich and in industries that are not so heavily tied to economic strength such as food and healthcare. The combination of a global recession and a significant debt load could weigh heavily on this stock, in the event of another downturn.

5) Caterpillar has significant pension obligations which according to Fitch Ratings is "sizeable". Pension obligations could weigh on this stock, especially if earnings decline. While Caterpillar is viewed as financially sound, Fitch recently pointed a few risk factors and recently stated:

"Credit concerns include CAT's cyclical end markets, a slowdown in mining associated with weak global economic growth, excess industry capacity that could pressure margins until demand improves, competitive pressure in emerging regions, negative free cash flow (NYSE:FCF) in 2012, and CAT's sizeable net pension obligation. CAT also faces risks related to the development of Tier 4 emissions technology for off-road vehicles, but CAT is on track for on-time compliance."

While Caterpillar is a great company with solid products, the risk factors might be higher than some investors are willing to acknowledge, especially if a global economic downturn or a sudden financial crisis strikes again. It's worth noting that after the financial crisis began in 2008, Caterpillar shares traded down to about $24 in early 2009. That is a long way down from current levels and it shows the downside potential when a company with a significant debt load is also faced with a weak economy. We may not see another financial crisis of the same magnitude, but it is possible if Europe breaks apart or if China's real estate market suddenly deflates. Even a recession of much smaller proportions could put major pressure on Caterpillar shares, and that is why investors should not gloss over the downside risks. Because of this, I would wait for a significant pullback before considering an investment in Caterpillar.

Here are some key points for CAT:
Current share price: $90.21
The 52 week range is $78.25 to $114.25
Earnings estimates for 2013: $8.03 per share
Earnings estimates for 2014: $9.41 per share
Annual dividend: $2.08 per share which yields 2.3%

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Source: 5 Downside Risks That Investors Should Not Gloss Over With Caterpillar