With shares of Caterpillar (NYSE:CAT) trading around $83, 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 Weak
Caterpillar stock has struggled to make significant progress in recent years and has been very volatile. The stock is now trading towards the bottom of a price range extending back to early 2011 which also coincides with key breakout prices that may now act as support. 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 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 | 21.09% | 10% | 9% |
What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the last 30 and 90 trading days.
| Put IV Skew | Call IV Skew | |
| May Options | Steep | Average |
| June 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 small 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?
| 2013 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 figures, 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 | -7.05% | 2.14% | 5.96% | -4.14% | 8.68% |
Caterpillar has been a relative underperformer, year-to-date.
Conclusion
Caterpillar provides essential industrial products that fuel infrastructure construction and mining projects in growing countries around the world. The stock has not made much progress in recent years and is now trading near the low end of a range that extends back a few years. Earnings and revenue figures have sent mixed signals to investors who have been pleased with recent earnings reports, regardless. Relative to its peers and sector, Caterpillar has trailed in year-to-date performance by a significant margin. WAIT AND SEE what Caterpillar does this coming quarter.
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