Earth-moving equipment manufacturer Caterpillar, Inc. (NYSE: CAT) continues to trade near the 12-month high of $84.73. Recently, IronPlanet, the company’s online marketplace for used heavy equipment, was sold to Ritchie Bros Auctioneers (RBA) for $758.5 million. Caterpillar also entered into a partnership deal with RBA for a live on-site and online auction of the company’s used equipment. The deal will become effective once the sale of the IronPlanet website is completed successfully in the first half of 2017. The twin deal is expected to provide significant benefits to both the companies. However, many analysts believe that the market has already factored in the benefits of the deal and the share price will begin to decline in the weeks ahead due to the reasons mentioned below. The stock ended Monday’s trading session at $81.69.
The Peoria, Illinois-based company reported fiscal 2016 second-quarter revenue of $10.34 billion, down 16% from $12.32 billion in the similar quarter of 2015.
For the quarter ended June 2016, the company recorded a net income of $550 million or $0.93 per share, compared to $802 million or $1.31 per share in the corresponding quarter last year. Excluding restructuring costs, Caterpillar reported adjusted earnings of $1.09 per share, against $1.40 per share in Q2 2015. However, the Q2 2016 non-GAAP earnings surpassed the analysts’ estimate of $0.96 per share.
Considering the difficult economic scenario, the world’s largest construction equipment manufacturer lowered its fiscal 2016 revenue forecast. The company now anticipates full-year 2016 revenue to be between $40 billion and $40.5 billion, down from the prior outlook of $40 billion to $42 billion. The company also slashed its fiscal 2016 earnings forecast to a range of $2.75 per share, from the prior estimate of $3 per share. Excluding restructuring costs, Caterpillar now anticipates earnings of $3.55 per share, down from $3.70 per share predicted earlier.
The management’s revenue outlook is 18% lower than last fiscal year and 40% lower than in 2012. It should be also noted that the company faces its fourth consecutive year of decline in terms of revenue and earnings. The forward P/E ratio of the company is 24. It is way higher than the five-year average P/E ratio of 17.
In 2015, Caterpillar announced plans to cut 10,000 jobs in several of its manufacturing facilities. To date, the company has 100,000 employees, which is 13,900 jobs less than what it was at the time of the announcement of restructuring plans. The company stated that it would still continue to trim the jobs to reduce costs. Thus, considering the overall negative view of the company, we believe that a trader should avoid investing in the stock at this point in time.
The stock has begun to decline after failing to cross above the major resistance of 84. Furthermore, technically, the descending stochastic indicator reflects bearishness in the stock. So, we can expect the stock to remain in a downtrend.
The historic price chart indicates that the next major support for the stock exists at 75. Considering that, we recommend purchasing a one-touch put option with a strike price of $75 or higher. The binary trader should also choose a contract whose validity extends until the first week of October.
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.
