The shares of construction machinery manufacturer Caterpillar Inc (NYSE: CAT) had rallied from a low of $80.33 to a high of $93 in a matter of ten days. To the surprise of some of the market participants, the share price started rising a week after the company reported a decline in the fiscal 2016 third-quarter revenue, compared to the previous year.
While reporting the third-quarter results, Caterpillar also trimmed its full-year 2016 revenue and earnings estimates. According to analysts, the stock spiked mainly due to the victory of Donald Trump in the US election. The US President-elect had earlier stated that he would spend more on infrastructure projects during the pre-election rallies. So, on the assumption that the funds would ultimately flow into infrastructure-related companies, the stock jumped sharply. However, based on the details provided below, we believe that the rally should be used as an opportunity to sell the stock or go short in the counter.
The Illinois-based owner of ‘Anchor’ brand coupling reported third-quarter revenue of $9.16 billion, down $1.80 billion from $10.96 billion in the third quarter of fiscal 2015. The third-quarter revenues were also below the analysts’ estimates of $9.86 billion.
For the quarter ended September 2016, the ‘Mak’ brand heavy fuel oil manufacturer recorded profits of $283 million, or $0.48 per share, compared to $559 million, or $0.94 per share, in the quarter ended September 2015.
Excluding restructuring charges, the third-quarter profit per share decreased to $0.85, from $1.05 per share in the corresponding quarter of 2015. However, the 3Q 2016 earnings surpassed the Zacks estimates of $0.76 per share.
The lower manufacturing costs of $234 million and the lower period costs of $420 million enabled the company to offset the negative impact of the $1.8 billion y-o-y decline in the revenue.
Considering the headwinds, Caterpillar slashed its revenue and earnings estimates for fiscal 2016. The company now anticipates a non-GAAP profit of $3.25 per share on revenue of $39 billion. This compares with prior guidance of $3.55 per share in non-GAAP profit on revenue of between $40 billion and $40.5 billion. The company also anticipates $800 million in restructuring costs, compared to the earlier estimates of $700 million issued in the second quarter.
The company does not foresee a major change in the revenue and earnings in fiscal 2017, compared to 2016. The main driving force behind the rise in the share price is the optimism created by the victory of Donald Trump. The fundamentals do not support a rise in the share price. Thus, a trader should use the opportunity to go short in the counter.
Based on the historic price chart, we can say that the stock is expected to face resistance at 98. The stochastic oscillator is forming a negative divergence with the price. So, we can presume that the stock is on its final leg of the uptrend.
Based on the forecast, a one-touch put option can be used for investment by a binary trader. The strike price of the put option should be equal to $90. A trader should also make sure that the put option does not expire before the second week of December.
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.
