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CATERPILLAR LONGS HOPING AND PRAYING FOR OVERSOLD SHARES TO HOLD SUPPORT

by
April 6, 2015 9:23 am
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Caterpillar, Inc. (NYSE: CAT) shares have fallen from grace badly in the last year – dropping from $111 and change last July to just over $80 currently. That is an extremely rough ride lower under any circumstances, but especially when the broader market has been flat to positive during that same time frame. Can the company pull things together and get the stock back on the right track? Or, are the economic prospects globally continuing to soften (which apparently – along with a rising US Dollar – has been the major headwind for the company’s stock)? Let’s go to the numbers and the chart to get an idea of how the future looks for CAT…

What the bulls see in Caterpillar…

• Some cheap valuation metrics:
o An enterprise value of $81.61 billion that easily trumps the stock’s market capitalization of $48.64 billion
o A price-to-sales ratio of 0.87
o A price-to-book ratio of 2.88
• Net profit margins of 6.7% that spin off $5.36 billion in positive levered free cash flows annually
• An acceptable short-term financial condition – as evidenced by the current ratio of 1.39
• Decent management effectiveness metrics:
o Return on assets of 4.28%
o Return on equity of 19.68%
• An annual dividend yield of 3.5%

What the bears see in Caterpillar…

• Some sketchy balance sheet metrics:
o Cash of $6.32 billion that is massively overshadowed by the company’s debt of $39.29 billion
o A debt-to-equity ratio of 233.53%
• A PE of around 16 that looks rich when compared to the company’s estimated revenue and EPS growth for next year of 0% and 6.1% respectively.

The technical take on CAT shares…

Technicians note that Caterpillar shares are trading just above horizontal line support at $78.25 (the intramonth low from July 2012). However, if the “ABC” downside correction drawn on the CAT chart comes to fruition, the stock would have to trade as low as $72.64 in the near future. If the bulls can make a stand here or at the $72.64 level, the first resistance the stock would hit would be $85.81. Above that, the next key level will be horizontal line resistance at $99.03.

Overall…

Patience may truly be a virtue here for the prospective CAT longs. The technicians call for a move down to $72.64 may be the perfect entry – or at least a low-risk entry given the proximity to the stop-loss trigger just below that level. Perhaps everyone would do well to read what kind of message this stock’s drastic underperformance could mean in terms of the condition of the global economy.


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