Can Caterpillar Produce Higher Prices?

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.

Caterpillar announced third-quarter sales and revenues of $13.423 billion, down from $16.445 billion in the third quarter of 2012. Profit per share for the third quarter of 2013 was $1.45, down from third-quarter 2012 profit per share of $2.54.”This year has proven to be difficult, with expected sales and revenues nearly $11 billion lower than last year. That is a 17 percent decline from 2012 with about 75 percent of the drop from Resource Industries, which is principally mining. We expect Resource Industries to be down close to 40 percent for the full year and Power Systems' and Construction Industries' sales to each be down about 5 percent,” said Caterpillar Chairman and Chief Executive Officer Doug Oberhelman.

T = Technicals on the Stock Chart Are Mixed

Caterpillar stock has remained fairly neutral over the last couple of years. The stock is currently trading near the high-end of a near-term range so expect a battle at current prices. 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 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	22.44%	50%	48%

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
November Options	Flat	Average
December Options	Flat	Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bullish 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	-6.13%*	-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 had conflicting feelings about Caterpillar’s recent earnings announcements.

* As of this writing

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	-6.45%	-2.86%	22.46%	25.06%	10.55%

Caterpillar has been a poor relative performance leader, 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. A recent earnings release has investors not impressed with the company. The stock has remained neutral in recent months and looks poised to continue this path. Over the last four quarters, earnings and revenues have been decreasing which has produced conflicting feelings 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.