Caterpillar Signals Bullish Reversal on Strong FY17 Outlook

Caterpillar Signals Bullish Reversal on Strong FY17 Outlook

In the last week of April, earth moving equipment manufacturer Caterpillar Inc. (NYSE: CAT) reported exceptional fiscal 2017 first-quarter results that beat analysts’ estimates. The market rewarded the company by pushing the stock price to a 12-month high of $105.28. However, profit booking has brought the stock below the psychological level of $100. Due to the facts presented below, we forecast a bullish reversal from the yesterday’s closing price of $100.36.

The Peoria, Illinois-based company reported fiscal 2017 first-quarter profit of $192 million, or $0.32 per share, on revenues of $9.82 billion. This compares with a net profit of $271 million, or $0.46 per share, on revenues of $9.46 billion in the similar quarter last year. Analysts at Wall Street anticipated the company to report revenues of $9.271 billion. The decline in the GAAP net income was mainly due to an increase in the operating expenses to $1.03 billion in the recent quarter, from $397 million in the same period of the previous year.

Machinery, energy, & transportation revenue increased $350 million y-o-y to $9.13 billion. Similarly, during Q1 2017, financial product revenue increased marginally to $692 million, from $681 million in Q1 2016.

Excluding restructuring costs, Caterpillar reported 1Q17 earnings of $1.28 per share, up from $0.64 per share in 1Q16, and above analysts’ estimates of $0.62 per share.

The company has also benefited significantly from its cost-cutting program, thereby resulting in an improved cash flow. At the end of March 2017 quarter, cash and short-term investments increased to $9.472 billion, from $5.89 billion in the corresponding quarter last year. Caterpillar stated that it is expecting recovery in the Chinese market.

On the basis of recovery seen in several industrial sectors, Caterpillar has raised its fiscal 2017 earnings and revenue outlook. The company now sees FY17 revenues to be between $38 billion and $41 billion, compared with the prior guidance range of $36 billion to $39 billion.

Caterpillar also raised its full-year 2017 non-GAAP earnings outlook to $3.75 per share, from the January guidance of $2.90 per share. The Street is forecasting earnings of $3.26 per share on revenues of $38.27 billion. Thus, considering the strong quarterly performance and upbeat FY17 outlook, fundamentally, the stock is forecasted to remain bullish.

The historic price chart indicates that the stock had opened with a positive gap (indicated by an aqua coloured circle) on the day quarterly results were announced. Now, the decline ensured that the gap is covered. Furthermore, the momentum indicator is rising, while the RSI reading is over 50. Thus, an appreciation in the stock price can be anticipated.

Caterpillar - Technical Analysis - 11th May 2017

Under the current circumstances, an investment can be made in a call option when the stock of Caterpillar trades near $100 in the NYSE. Finally, the binary trader can look for an option expiration date falling within 10 trading days from the time of investment.

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