Caterpillar: Bulldozing for Profits on Calls

As the earnings season gets underway, we will explore the possibilities inherent in the options of Caterpillar Inc. (NYSE:CAT) today. Caterpillar with its market capitalization of $65.29B is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. It operates in two segments: Machinery and Power Systems, and Financial Products.

Caterpillar in the News

Caterpillar caught my attention after the company reported impressive second quarter earnings yesterday. Caterpillar reported second quarter earnings of $1.69 per share to beat the consensus analyst estimate of $1.52 by a good $0.17. The company reported revenue that was a little lower than estimates when it reported revenue of $14.15B compared to an consensus’ estimate of $14.46B.

Highlights of the second quarter earnings are provided below,

  • Caterpillar recorded net earnings per share of $1.57 during the second quarter, up 8% from last year’s $1.45 per share. It might interest you to know that the quarter’s earnings included a negative impact of $0.12 earnings per share for restructuring activities; earnings per share could have reached $1.69 per share when adjusted for that negative charge.
  • Profit before income taxes increased by 30% to $206M on an annual basis and profit after taxes increased 32% to $146M on an annual basis
  • The company announced plans to repurchase another $2.5 billion of Caterpillar stock in the third quarter. This repurchase continues in line with the $10 billion repurchase previously approved in the first quarter of 2014.

Quoting, Kent Adams, president of Cat Financial and vice president with responsibility for the Financial Products Division of Caterpillar Inc. “we are pleased with our continued solid performance in the second quarter driven by the continued growth in earning assets…The global Cat Financial team remains focused on helping Caterpillar customers and Cat dealers succeed through financial services excellence.”

Year-to-Date Performance

CAT Stock Chart

The stock chart above plots Caterpillar’s stock performance in the year-to-date period in comparison to the S&P 500. You will observe that the stock has outperformed the S&P 500 by 119 percent when you consider its 15.46% gains in comparison to the 7.03% YTD gain of the S&P 500.

Upside Potential Ahead

Caterpillar’s reporting segments provide some insight into the kind of the upside potential we can expect on the stock going forward. For instance, sales in the company’s construction segment increased by 11% and operating profit in the construction industries was up 83%.  In addition, sales in the company’s Energy & Transportation segment increased by 6%. However, sales in the Resource Industries segment reduced by 75%. Nonetheless, the reduction in the Resource Industries was offset by a $500M improvement in manufacturing costs.

How to Trade CAT Options

I am bullish about Caterpillar’s prospects going forward because of its impressive run so far this year. Another reason to be optimistic about Caterpillar going forward is its cost-cutting initiatives that have brought about $500M in savings. I recommend the CAT Jan 2015 115.000 call (CAT150117C00115000).

— Daily Option Alerts

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