Can Caterpillar Continue to Rise Post-Earnings?

With shares of Caterpillar (NYSE:CAT) trading around $90, 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 posted a stronger-than-expected quarterly profit on Monday as cost cuts and an uptick in demand for its building equipment offset continued weak sales to the mining industry. The results, together with a better-than-estimated preliminary profit forecast for 2014 and a new $10 billion share repurchase plan, sent Caterpillar’s stock up as much as 7 percent in early trading on the New York Stock Exchange.

“We expected there would be a decline in mining sales in 2013, and it turned out to be worse than we anticipated,” Doug Oberhelman, the chair and chief executive officer, said in a statement. “As a result, we took substantial actions to reduce costs which helped mitigate the impact on profit.” Caterpillar, which cut nearly 10,000 jobs globally last year, said it was beginning to see “some signs of improvement in the world economy, which should be positive for sales” down the road. It expects construction-equipment sales, which jumped 20 percent in the most recent quarter, to rise another 5 percent in the coming year.

T = Technicals on the Stock Chart Are Strong

Caterpillar stock has remained fairly neutral over the last couple of years. The stock is currently surging higher and looks poised 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 above its rising key averages, which signal neutral to bullish 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	21.07%	43%	40%

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
February Options	Flat	Average
March 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 minimal 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 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 Q4	2013 Q3	2013 Q2	2013 Q1
Earnings Growth (Y-O-Y)	N/A	-42.91%	-42.91%	-44.73%
Revenue Growth (Y-O-Y)	4.71%	-18.38%	-15.83%	-17.34%
Earnings Reaction	4.40%*	-6.06%	-2.43%	2.83%

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

* As of this writing

P = Excellent 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	-1.43%	-6.05%	-11.00%	-11.60%	-5.16%

Caterpillar has been a 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. The company reported fourth quarter earnings that came out stronger than expected. The stock has remained neutral in recent months, but is currently suring higher. Over the last four quarters, earnings have been decreasing while revenues have been rising which has left investors pleased. Relative to its peers and sector, Caterpillar has been a relative year-to-date performance leader. Look for Caterpillar to OUTPERFORM.