With shares of Caterpillar (NYSE:CAT) trading around $84, 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.
T = Technicals on the Stock Chart are Mixed
Caterpillar stock has been struggling over the last year or so as it trades in an established price range. The stock is at the low end of its range at the moment so a strong move from here may be imminent. 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 slightly below its key averages which signal neutral to bearish price action in the near-term.
(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 | 23.53% | 73% | 71% |
What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.
| Put IV Skew | Call IV Skew | |
| July Options | Steep | Average |
| August 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 very 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 Mixed 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?
Hot Insurance Companies To Own For 20142013 Q1 | 2012 Q4 | 2012 Q3 | 2012 Q2 | |
| Earnings Growth (Y-O-Y) | -44.73% | -55.16% | 48.54% | 67.11% |
| Revenue Growth (Y-O-Y) | -17.34% | -6.77% | 4.64% | 22.09% |
| Earnings Reaction | 2.83% | 1.95% | 1.45% | 1.43% |
Caterpillar has seen mixed earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Caterpillar’s recent earnings announcements.
P = Poor 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 | -4.94% | -1.00% | 12.51% | 8.34% | 2.46% |
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. The stock has not done so well in the last year as it trades at the low-end of an established price range. Over the last four quarters, earnings and revenue figures have been mixed which has surprisingly sat well with investors in the company. Relative to its peers and sector, Caterpillar has been a poor year-to-date performer. WAIT AND SEE what Caterpillar does in coming quarters.
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