Update: Hold CAT Puts

By Linda McDonough • January 26, 2017

Caterpillar, on which I recommended a put Dec. 29, reported a mixed quarter this morning. The headline adjusted earnings were 85c versus an estimate of 67c. However, revenue dropped 13% and was $200 million less than expected. Guidance for 2017 was weak- $2.90 versus current estimates of $3.07 and sales of “less than $38 billion versus expectations of $38.3 billion.

The stock, which began the day up a bit, trended down during the company’s 11 am conference call. Management pointed out that guidance is dependent on a more dramatic improvement in the second half of the year. This means that current demand levels remain punk and that estimates may come down further if demand does not reignite in the second half of the year.

Management also warned that more restructuring charges may be on the horizon above and beyond the $500 million currently expected. As a point of reference, Caterpillar recorded $1 billion in restructuring charges in 2016 and $900 million in 2015. These charges have equaled almost half of all profits in the two year period.

I suggest holding on to the puts with the expectation that the stock will drift lower.

Stock Talk

Comments Oldest First

Comments Guidelines

C. Fisher

02/13/17 ‐ 11:56am ET February 13, 2017 at 11:56am ET

Can we get an update on CAT?

Linda McDonough

02/13/17 ‐ 12:49pm ET February 13, 2017 at 12:49pm ET

Hello,

Unfortunately these puts will expire worthless. Although CAT gave a poor prognosis on its Jan. 26 earnings call, the stock suffered only a brief drop. I held on to the puts with the expectation that the stock would eventually behave rationally. This is one of the toughest situations- when I get the fundamentals right but the stock does not respond as I expect. If the news had been good and I was simply wrong, which happens sometimes, I would have sold them immediately.

Best,
Linda

04/07/17 ‐ 3:54pm ET April 7, 2017 at 3:54pm ET

Linda
Thank you for the last reply. Thinking and trusting your fundamentals were right I am still short CAT. The last announcement for the dividend was Dec 15 2016. So thinking this dividend announcement is late. Do you have any thoughts on this?

04/10/17 ‐ 9:24am ET April 10, 2017 at 9:24am ET

Hello,
I do not think CAT is late with its dividend announcement. Last year it was announced on April 13, so I think they have a week before it would be considered late. My bear trade on CAT was based on its fourth quarter earnings release, which I thought was quite bad. Investors, however, chose to focus on management’s optimism about future sales. In late March the company announced monthly sales for its three divisions. Two divisions were still in decline, but dropped a smaller amount than prior months. Construction sales (35% of total sales) were up 2%. I’m not super negative on CAT right now as I am worried the positive sentiment of the market will carry it for a bit.
Best,
Linda

Add New Comments

You must be logged in to post to Stock Talk