The stock of earthmoving equipment manufacturer Caterpillar Inc (NYSE: CAT) registered a new 12-month high of $97.33 on December 7th. Considering the stress given by Trump to fix the infrastructure of the US, the stock of companies in the construction-related sector rallied like there is no tomorrow.
However, we believe that the Fed’s statement, scheduled to be issued at the end of the FOMC meeting on Wednesday, will guide the market back to fundamentals. So, based on that expectation, we forecast the stock of Caterpillar to undergo a correction in the days ahead.
Based on a detailed study, the analysts at Macquarie’s research have stated that a fiscal stimulus can utmost add 2% to the GDP growth. Thus, Caterpillar is not going to benefit in such a manner that it offsets the revenue decline caused by the prevailing weakness in the global economy.
In fact, the pessimists believe that Caterpillar would be more affected than benefited from Trump’s policies as the company derives nearly 60% of its income outside the US.
Ann Duignan, the analyst at J.P.Morgan expects the company to report lower sales volumes and spend nearly $600 million more in incentive compensation. She further expects Caterpillar financial to report a y-o-y decline of $100 million in profit in 2017. For next year, the analysts have given a price target of $89, which is 6% less than the current traded price.
On average, 22 analysts surveyed by FactSet anticipate the stock to trade at $85.23 in 2017. This represents about an 11% decline from Friday’s closing price of $95.53.
Considering the headwinds faced by the company, Fitch had lowered the rating of Caterpillar to “negative”, from the prior “stable” rating.
Doug Oberhelman, the CEO and Chairman of Caterpillar stated that regulation, labor, and health care policy reform is required for bringing jobs back to the US. Commenting on the analysts’ earnings estimates of $3.25 per share on revenue of $39 billion, Oberhelman stated that the “market is too optimistic considering the headwinds”. Thus, we forecast a decline in the stock in the days ahead.
The historic price chart reveals that the stock is facing resistance from sellers at 95.40. The MACD indicator is currently moving deeper into the negative zone. Thus, we can anticipate Caterpillar to decline further.
A binary trader can purchase a put option (otherwise referred to as low or below option) through the trading platform provided by a suitable broker. The contract can be bought as long as the price of the underlying asset is greater than or equal to $95. The trader should preferably use December 20th, or any date closer, as the expiry date for the contract.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
