** OPTION TRADE: Buy the CAT JAN 19 2018 135.000 CALL at approximately $3.10. Place a pre-determined sell at $6.20.
Also include a protective stop loss of $1.25.
Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!
by Ian Harvey
Melius Research’s Rob Wertheimer writes that for the second time in two decades, machinery stocks are trading at a premium to multi-industry.
From the note:
Underlying demand is strong. North American construction is touching prior highs, and high frequency indicator Komtrax shows dirt being moved growing single digits after a long weak stretch. Trucking rates and utilization are picking up; the indicators are volatile and low quality, but all pointing positive. Blow up risks are low…there’s no housing crisis that lurked beneath strong machinery results in 2007-8. Machinery multiples should have already contracted, but too often shares trade at high multiples on high earnings for too long.
Wertheimer writes that heavy machinery maker Caterpillar Inc. (NYSE:CAT), which manufactures construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives, is one of his highest Buy-Accumulate rated stocks.
Caterpillar reports third quarter earnings before the opening bell on October 24 and analysts expect the construction equipment giant to earn $1.20 a share. The stock closed at $130.71 on Oct. 13, up 40.9% year-to-date, and in bull market territory, 57.4% above its postelection low of $83.06 set on Nov. 8.
Caterpillar raised its guidance for 2017 in its last earnings report. Revenue expectations were raised from $38-$41 billion to $41-$44 billion. The earnings per share midpoint was raised from $2.10 to $3.50.
Caterpillar, Inc. has a market cap of $77.74 billion, a P/E ratio of 734.92 and a beta of 1.26. The firm’s 50 day moving average is $124.38 and its 200 day moving average is $110.39. Caterpillar, Inc. has a 12-month low of $80.33 and a 12-month high of $131.63.
Influencing Factors
The company’s Q3 estimates moved up 38.6% over the past 90 days. Its expected earnings growth for the fourth quarter is 49.7%. Notably, the stock has gained 38.7% so far this year, outperforming the industry’s 37.2% gain.
After dismal performances last year, Caterpillar has recovered this year driven by continued improvement in the construction sector, pickup in Resource Industries and disciplined cost-control efforts. Looking at the upbeat estimates for both revenues and profits of its main segment, Machinery, Energy & Transportation for the third quarter, seems like the company is set to maintain the momentum. Notably, revenues in the construction sector will again be led by Asia Pacific and most importantly, Resource industries will deliver an overall improvement across all regions.
In September 2015, Caterpillar set upon significant restructuring and cost reduction initiative, with actions expected through 2018. Once fully implemented, the plan would lower annual operating costs by about $1.5 billion. This will be backed by the consolidation or closure of more than 30 facilities that would decrease manufacturing square footage by more than 10% and reduce the workforce by more than 10,000 people.
In the third quarter, revenue growth along with cost reduction will lead to an improved bottom-line as well. The Consensus Estimate for Profit before Taxes for the Machinery, Energy & Transportation segment is at $538 million, projecting an impressive 166% year-over-year growth.
Analysts and Hedge Funds Opinions
Goldman’s Jerry Revich, rates Caterpillar a Buy, raised his price target on the heavy machinery maker from $143 a share to $158 a share. That’s the second-highest target price of any of the 26 analysts covering Caterpillar.
Caterpillar has spent the past year digging out from the ruins of former CEO Doug Oberhelman’s big money investments, which ran into a cement wall when global commodity prices went bust. His replacement, Jim Umpleby has overseen a downsizing and that has reduced jobs and cut costs.
Now, Goldman’s Revich has lifted earnings
estimates, predicting that Caterpillar will funnel more cash towards share
repurchases and M&A activity, and predicted upside to profit margins for
the company’s construction industries unit.
Several other analysts have also recently commented on the company…..
Two analysts have rated the stock with a sell rating, fourteen have given a hold rating and fourteen have given a buy rating to the company’s stock. The stock has an average rating of “Hold” and an average target price of $119.82.
Several institutional investors have recently made changes to their positions in the stock, to name a few….
Harvey’s Options Volatility Indicator
This year's rally has pushed Caterpillar stock through multi-year resistance, giving investors new hope that larger gains could be on the way. A 2.4% dividend yield helps, too. So too does a higher price target from Goldman, Sachs & Co. The analyst assigned a Street-high $158 price target, implying about 25% upside from current levels.
Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..
** OPTION TRADE: Buy the CAT JAN 19 2018 135.000 CALL at approximately $3.10. Place a pre-determined sell at $6.20.
Also include a protective stop loss of $1.25.
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