Call Options Or Put Options On Caterpillar (CAT)?

| March 20, 2013 | 0 Comments

CAT OptionsCaterpillar (CAT) is one of the largest construction, mining, and agricultural equipment manufacturers in the world.

CAT currently trades for $86.91 per share.  The shares are up 13% from the 52-week low of $78.25, but the stock is down 22% from the 52-week high of $112.00.  What’s more, the stock has recently fallen 13%.   

Is this an opportunity buy put options on CAT after dealer sales fell 13% in the last three months?  Or should you buy call options on CAT before business picks up later this year?

The bulls make a convincing argument…

CAT is a first class company with a strong management team and brand name recognition their competitors can only dream about. 

But as a multinational company, they can’t rely on the domestic growth alone.  They’re dependent on global economic growth to fuel revenue and earnings growth.

And unfortunately, the weak demand from Asia and Europe has weighed heavily on the shares as they’ve tumbled 22% lower over the last year. 

But here’s the thing…

This slowdown could have been much worse for CAT.  But management was out in front of these problems.  They slashed production ahead of the slowdown to minimize the impact of the slowdown. 

What’s more, the drastic 26% slowdown in Asian sales over the last three months is nothing more than an anomaly.  Last year the Chinese Luna New Year was February and this year it was in January.  So the slowdown is likely due to the holiday and we’ll see sales bounce back strong in the following month. 

At this point, if CAT reports anything positive, it will likely send the shares soaring back toward $100 in short order.

But the bears have a compelling case as well… 

The weakness in CAT’s recent sales report isn’t a surprise.  But the fact that sales were down in North America, Asia, Europe, Africa, and the Middle East is more than a little troubling.

There’s clearly a fundamental shift in the industry going on right now.

Right now there’s an oversupply of equipment.  There’s just too much supply and not enough demand for much of the heavy equipment CAT produces. 

And don’t forget, the price of the raw materials like copper, gold, and silver have fallen from their 2011 highs.  That means many of the miners that buy CAT’s equipment can’t justify spending millions of dollars right now.  

Here’s the thing…

CAT reported a 55% drop in 4th quarter profits in January.  And there’s no sign the market conditions that fueled that slowdown are changing. 

Earnings estimates for the first quarter have already taken a big hit.  But second quarter estimates haven’t come down enough yet.  That means CAT is likely in for another rough quarter when they report earnings again in April.   

If you think the bulls are right, take a look at buying the CAT May 2013 $90.00 calls for around $1.53.

If you think the bears are right, take a look at buying the CAT May 2013 $82.50 puts for around $1.65.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.