Caterpillar (CAT) reported third-quarter profits that were pleasantly surprising, anchored by U.S. heavy equipment sales. It posted profit of $1.7 billion, or $2.54 per share, compared with $1.14 billion, or $1.71 per share, in the same year-ago period. Considering the company is affected by global economics and the present global trend leans toward the bearish side, this U.S. equipment sales has helped it tread water. So what does this mean for investors? What can we glean from Caterpillar's numbers?
Mining equipment giant Caterpillar has spelled out an increasingly bleak diagnosis for the global mining industry. Credit Suisse lowered Caterpillar's price target from $117 to $108, while the stock presently trades at $83.79.
The stock has been struggling with sideways movement, and the latest challenge has been a second forecast cut by with dire warnings of an increasingly slower global economy. It would be different if Caterpillar came out and said this alone, but there are other large global companies that are highly respected that have said the same things. General Electric (GE) and Honeywell (HON) have both expressed tepid recovery rates for the economy. The mining machine giant is watching dealers sell off inventory without buying new pieces to fill its stock. So what are the consequences? Additional production cuts for Caterpillar.
The company expects economic growth, but not until the second half of 2013. Even China, which has a slowing economy and is also influencing Caterpillar's bottom line, will continue to take measures in an attempt to stabilize its economy.
So what does this mean for the company? Some analysts believe that the 20% drop in stock value over the last six months makes Caterpillar a good buy. The future growth of the global economy makes Caterpillar a perfect long-term investment for investors who can be patient and wait for economic growth. I must place emphasis on the phrase "be patient." The next few quarters may not be very favorable for the economy and could get pretty tough.
For investors as a whole, I would glean from Caterpillar's warning and numbers that we should expect more contraction in the global economy for a few quarters into 2013 before we see a stabilization and possible turnaround. Caterpillar expects sales to continue to slide into next year as falling metal and coal prices cause production levels to dry up. The turnaround is not expected to happen quickly, either. Caterpillar slashed its earnings forecasts clear into 2015. So investors should not expect a quick turnaround. Do responsible research, invest when you are ready, and hunker down for the long term.
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After a low point in mid-summer, it looks as if Caterpillar could be defining a trading channel. Although it is a relatively wide channel ($81-$94), it may trade in this range for a while. The RSI indicator looks as if it is following the stock, and has been moving between the "50" mark while the stock moves up and down. This gives us no sense of direction except sideways movement.
We can see the same thing in the MACD indicator. It is supporting the RSI and the sideways movement as it also moves between the "0" band with no defined direction. I would expect the stock to possibly move up very soon if it is sticking to its defined support of $81.75. It will be interesting to see if the 50-day MA will become resistance.