Some are Bullish on Caterpillar
Caterpillar (CAT) continues to see extreme moves as investors remain overly focused on broad macroeconomic forecasts that the company issued, even though the company posted record profits. Some analysts are getting chummy with the company going into 2013. It is speculated that Caterpillar can grow earnings by 15% in the next few years and could easily expand its earnings multiple to 12 times from the 8 times it is today.
So it could be a strong 2013 for Caterpillar as it is expected to grow 23% despite the stock's low valuation. October sales were up for the company. Global sales were up 8% and were led by a 13% gain in the North American region. Power Systems jumped 1% while industrial was 17% lower.
JP Morgan (JPM) downgraded CAT to neutral from overweight with a price target of $90 as the company has excessive inventory levels and mining spending is lower. Ann Duignan, an analyst for JP Morgan said the following about the stock:
"We cannot overlook the continued pressure the mining sector is facing to reduce capex, as well as the re-election of President Obama and the impact this could have on the U.S. coal and energy sectors."
With the devastation from "Sandy" along the eastern seaboard, a question comes to mind: Is this an opportunity for Caterpillar sales? Flooded homes need to be cleared and many foundations rebuilt. Governments may need to repair washed out roads, railroad tracks and/or bridges. And on the coast, coastlines, harbors, and possibly beaches need to be restored. All this translates into heavy duty machinery. Damage repair will exceed $40 billion easily but will it translate into sales for caterpillar? I am not confident that this is a major market mover but it could increase sales for a quarter for the machinery giant.
Long Term Investing in Caterpillar
The probability of sales from "Sandy" boosting revenue in the short run is good, but I do not believe it is the catalyst for long term growth. I can see it propping up numbers temporarily. I am concerned about the whole mining industry in 2013 because there is still pressure to cut cap spending and this does not translate into revenue for Caterpillar. I am concerned about the company's sales overall. In October the company even announced that it could possibly see sales lower by 5% next year. I do not see the stock moving up and out of its trading zone through the first half of 2013 without an abrupt change in global economic conditions.
It appears Caterpillar has been in a trading channel since about April of this year and it looks like it has been consolidating all this time, trading closer and closer together. It moves in between (80-91), with a couple extremes in there on both sides. I believe as I observe the stock's chart the indicators I use confirm what I am seeing. If we look at the RSI indicator and the MACD, we can see them consolidating as they move closer and closer together. The RSI in narrowing at the '50' marker, and the MACD narrowing at the '0' marker. What I would like to look for is a narrowing of the Bollinger Bands also before I would consider looking for a break out on either side. For now, I see the stock continuing to consolidate.
Short Term Income Investing
I would not create an income play on Caterpillar yet. It is presently within the middle of its trading zone and I would like to see it bounce off its bottom support around 80.75 before I would create an income play. At that point, look at a Bull Call Spread as an income play because it has limited risk compared to some other types of plays.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.