Earnings Preview: Dow Components General Electric And Caterpillar Take The Stage This Week

Several of the industrial giants are scheduled to report quarterly results this week. General Electric Company GE reports earnings before market open on Wednesday, Jan. 24 and Caterpillar inc CAT takes the stage before market open on Thursday, Jan. 25.

General Electric Earnings and Options Trading Activity

GE has been through multiple restructurings over the years, announcing layoffs and business divestitures along the way. On top of the ongoing restructuring initiatives, there’s been quite a bit of news out from GE over the past few months.

The company cut its dividend in half in mid-November, bringing it to a current yield of about 2.5% at the time. And CEO John Flannery said that “all options are on the table” after the company announced it would incur a $6.2 billion charge in Q4 related to insurance in its GE Capital unit. The charge wasn’t a complete surprise, as Flannery hinted at it in November by saying it would be more than $3 billion, but it was quite a bit higher than most analysts were expecting. 

GE COMPANY PROFILE. The company profile above shows General Electric’s (GE) major divisions. CEO John Flannery recently unveiled a plan to sell more than $20 billion in assets and focus primarily on the company’s aviation, healthcare and power divisions. TD Ameritrade clients can analyze potential revenue drivers of a stock on the Fundamentals tab on the thinkorswim® platform. Trefis information and estimates used in Company Profile are provided by Insight Guru, a separate and unaffiliated firm. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

For the fourth quarter, GE is expected to report adjusted earnings per share (EPS) of $0.28, down from $0.46 in the prior-year quarter, on revenue of $32.69 billion, according to third-party consensus analyst estimates. Revenue is projected to decrease 1.2% year over year.

Options traders have priced in about a 4% potential stock move in either direction around the upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. With all the uncertainty surrounding the stock lately, implied volatility is on the high end at the 90^th percentile.

In short-term trading at the January 26 weekly expiration, calls have been active at the 16 and 16.5 calls and puts have been active at the 16 strike. At the February 16 monthly expiration, calls have been active at the 16.5 and 17 strikes, while volume has been heavier on the put side and concentrated at the 16 strike. There was a sizable trade of 22,495 15-strike puts at the February monthly expiration at a price of $0.23 per contract during yesterday’s trading session.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Caterpillar Earnings and Options Trading Activity

CAT has received a number of analysts upgrades recently, with 2 additional buy ratings in the past month. A combination of accelerating economic growth, the potential for increased infrastructure spending in the U.S., as well as rebounding commodity prices, which has helped the company’s mining equipment business, were some of the positive factors cited by analysts.

For the fourth quarter, CAT is expected to report adjusted EPS of $1.77, up from $0.83 in the prior-year quarter, on revenue of $12.01 billion, according to third-party consensus analyst estimates. Revenue is expected to increase 25.5% year over year and also come in at the highest level it’s been over the past eight quarters. The company has beat earnings estimates in seven out of the past eight quarters. 

CAT PERFORMANCE SINCE 2017. Caterpillar (CAT) outperformed the broader indices by a wide margin since the start of 2017 and is up 81.82%, compared to the Dow’s ($DJI) 31.85% increase, charted as the purple line, and the S&P 500’s (SPX) 25.47% gain, charted on as the teal line. Heading into earnings, CAT is a few points off its all-time high of $173.24 that it hit on Jan. 16. Chart source: thinkorswim^® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Around the upcoming earnings release, options traders have priced in about a 3.8% potential stock move in either direction, according to the Market Maker Move indicator.  As of this morning, implied volatility is at the 86^th percentile.

In short-term trading at the January 26 weekly expiration, calls have been active at the 172.5 strike price, while puts have been active at the 162.5 strike. At the February 16 monthly expiration, trading has been spread out across a wide range of strikes for both calls and puts. Further out at the March 16 monthly expiration, there’s been a decent amount of activity at the 170-strike call, with volume of 1,347 contracts at that strike during yesterday’s session.

Looking Ahead

Earnings season continues with a tech-heavy week coming up. Microsoft Corporation MSFT and Facebook Inc FB both report after market close on Wednesday, Jan. 31, and Apple Inc. AAPL, Amazon.com, Inc. AMZN and Alphabet Inc GOOG GOOGL are scheduled to report after market close on Thursday, Feb. 1.

And there are a few bigger economic data releases coming up. The government’s first estimate for Q4 gross domestic product (GDP) comes out this Friday morning and, next week, January unemployment figures and non-farm payrolls are scheduled to be released in the morning on Friday, Feb. 2. The Fed also holds its meeting of 2018, which is Fed Chair Janet Yellen’s last before handing over the reins to Fed Governor Jerome Powell. To get a rundown on what else is happening across markets, make sure to check out today’s Market Update.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.