Call Options Or Put Options On Caterpillar (CAT)?

| July 25, 2012 | 0 Comments

CAT OptionsCaterpillar (CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide.

CAT stunned investors with impressive second quarter earnings.  Profits at the heavy equipment manufacturer jumped 67% last quarter.  And CEO Doug Oberhelman said, “We’re expecting a record year in 2012.”

CAT currently trades for $82.88 per share.  It’s up 25% from the 52-week low of $66.16.  But it’s down more than 28% from the 52-week high of $115.72.

Is this an opportunity to buy call options on Caterpillar (CAT) as sales of heavy equipment soar?  Or should you buy put options on CAT as economic growth comes to a screeching halt?

The bulls make a convincing argument…

Despite some pockets of weakness in the global economy, demand for mining and construction equipment is strong.  In fact, CAT just raised their full year profit forecast by 10 cents. 

Don’t forget, heavy machinery sales went through one of their worst slumps from 2008 to 2010.  During that time, many of CAT’s customers put off purchases of new machinery. 

Now those customers are replacing their aging equipment.  And frankly, CAT can’t keep up with the demand.  In the last year alone, CAT’s backlog has increased 11% to more than $28 billion.

With so much pent up demand, growth is likely to remain strong for years to come, even if economic growth continues to slow.

At this point, Caterpillar’s stock is downright cheap.  CAT trades at a P/E of just 10.3.  That’s a big discount to the S&P 500 that trades at a P/E of 15.3.

Investors have clearly overestimated the impact slowing economic growth will have on CAT.  And the stock is due for a rally after a 28% drop from the recent high.

But the bears have a compelling case as well… 

It’s true that CAT had a great quarter.  They beat EPS estimates by 26 cents.  But they only raised full year guidance by 10 cents per share.

That means they’re expecting earnings in the second half of the year to fall 16 cents per share from their previous estimates.  That’s a clear indication they’re expecting business to slow later this year.

Let’s face it… slowing sales growth could easily turn into full blown declines if the global economy falls into a recession. 

And that’s the real story.  Nobody knows what the future holds.  With so much uncertainty in the global economy, CAT is likely heading lower as investors brace for the worst.

If you think the bulls are right, take a look at buying the CAT November 2012 $90 Call for around $2.30. 

If you think the bears are right, take a look at buying the CAT November 2012 $70 Put for around $2.35.

 ***Editor’s Note***  If you’re looking for good, high-quality sub-$1 penny stock recommendations, take a look at our friend Robert Morris’ newsletter, The Penny Speculator.  He’s got a great track record and always tries to keep his subscribers clear of ‘pump and dumps’!  Plus, he’s got a new pick coming out tomorrow that I want all of you to at least look at.  Click here for details on his newsletter.

Good Investing,

Corey Williams

Tags: , , ,

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.