Where Will Caterpillar Go Next?

With shares of Caterpillar (NYSE:CAT) trading around $85, is CAT 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 is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. It operates in two segments: Machinery and Power Systems, and Financial Products. Infrastructure investment is increasing around the world, in particular, in developing countries. A global supplier of industrial equipment, like Caterpillar, is poised to see rising profits from this trend. As long as countries continue to grow and develop, Caterpillar will provide the tools essential to create this progress.

In trading on Friday, shares of Caterpillar crossed above their 200 day moving average of $85.26, changing hands as high as $85.38 per share. Caterpillar Inc. shares are currently trading up about 1% on the day.

T = Technicals on the Stock Chart Are Strong

Caterpillar stock has remained fairly neutral over the last couple of years. The stock is currently in a range and looks set to continue. 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 between its rising key averages, which signal 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

16.79%

30%

28%

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

Put IV Skew

Call IV Skew

December Options

Average

Average

January Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral 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 Decreasing 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 importantly, how did the markets like these numbers?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-42.91%

-42.91%

-44.73%

-55.16%

Revenue Growth (Y-O-Y)

-18.38%

-15.83%

-17.34%

-6.77%

Earnings Reaction

-6.06%

-2.43%

2.83%

1.95%

Caterpillar has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been optimistic about Caterpillar’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Caterpillar stock done relative to its peers, Deere (NYSE:DE), General Electric (NYSE:GE), Cummins (NYSE:CMI), and sector?

Caterpillar

Deere

General Electric

Cummins

Sector

Year-to-Date Return

-4.53%

-1.05%

28.47%

20.57%

11.86%

Caterpillar has been a poor relative performer, year-to-date.

Conclusion

Caterpillar is a provider of construction and related industrial products and services during a time where countries around the world are seeing expansion. Shares of Caterpillar crossed above their 200 day moving average of $85.26, changing hands as high as $85.38 per share. The stock has remained neutral in recent months and is currently in a range. Over the last four-quarters, earnings and revenues have been decreasing which has left investors optimistic about the company. Relative to its peers and sector, Caterpillar has been a weak year-to-date performer. WAIT AND SEE what Caterpillar does in coming quarters.

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