Does Caterpillar Support Higher Prices?

With shares of Caterpillar (NYSE:CAT) trading at around $85, is the company an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Caterpillar manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. The company operates in two segments: machinery and power systems, and financial products. Caterpillar is a bellwether in the industrial development arena. As global growth is on the rise, look for companies such as Caterpillar to be well-positioned to capitalize on this movement.

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Head on over to the next page to explore the technical landscape of Caterpillar’s stock…

T = Technicals on the Stock Chart are Weak

Caterpillar stock has been in a consistent uptrend for most of the last two decades. Currently, the stock has backed away from all-time highs and looks to be digesting long-term gains. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Caterpillar is trading around its tangled key averages, which signals neutral price action in the near-term.

CAT

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Caterpillar options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Caterpillar Options

23%

66%

59%

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What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

April Options

Steep

Average

May Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates, and the conclusion…

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Caterpillar’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Caterpillar look like and more important, how did the markets like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

-55.79%

48.54%

67.11%

28.8%

Revenue Growth (Y-O-Y)

-6.73%

4.58%

22.07%

23.4%

Earnings Reaction

1.95%

1.45%

1.43%

-4.57%

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Caterpillar has seen increasing earnings and revenue growth in three out of the last four quarters. From these figures, the markets seem to be pleased with Caterpillar’s last four earnings announcements.

P = Poor Relative Performance Versus Peers and Sector

How has Caterpillar stock done relative to its peers, Deere (NYSE:DE), Joy Global (NYSE:JOY), CNH Global (NYSE:CNH), and the sector?

Caterpillar

Deere

Joy Global

CNH Global

Sector

Year-to-Date Return

-8.41%

-3.31%

-12.42%

-5.32%

6.29%

Caterpillar has been one of the weakest performers of its sector year-to-date.

Conclusion

Caterpillar provides the machinery required for global expansion. The overall sector has seen some slowdown this year, but earnings and revenue growth posted by Caterpillar has pleased investors. Still, relative to its peers and sector it has been one of the weakest stocks. WAIT AND SEE what Caterpillar does in the coming quarter.

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