CAT

Caterpillar Testing the 2018 All-Time High

Dow component Caterpillar Inc. (CAT) rallied more than 2% in Friday’s U.S. session after Wells-Fargo pounded the table, upgrading the heavy equipment manufacturer to ‘Overweight’. The rally stretched within 5 points of January 2018’s all-time high at 173.24, initiating a test that could eventually trigger a major breakout. However, market players may need to tread lightly because this level marks resistance while accumulation has failed to keep up with bullish price action.

Caterpillar Slumping 2020 Profits

The company reports Q3 2020 earnings on Oct. 27, with analysts expecting the company to report a profit of $1.15 per-share on $9.78 billion in revenue. That EPS performance would mark a 57% decline compared to the same quarter in 2019, raising doubts about the sustainability of a breakout. The stock is also trading nearly 40 points higher now than it was during the Q3 2019 earnings release, suggesting that short sellers will reload positions, given the right catalyst.

Well Fargo analyst Andy Casey outlined three reasons for higher Caterpillar prices, as follows:

  1. Revenue growth from global growth acceleration, with signs that key markets critical to the bear case are beginning to bottom, with likely growth by mid-2021 and the absence of 2020 inventory reduction actions.
  2. Expected margin improvement due to higher revenue generation across improved cost structure, although still below 2021 Investor Day target and in-line for 2022.
  3. Anticipated higher cash flow that could be allocated to enhance growth.

Wall Street And Technical Outlook

Wall Street consensus remains mixed despite the upgrade, with a ‘Moderate Buy’ rating based upon 7 ‘Buy’, 7 ‘Hold’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $120 to a Street-high $220 while the stock ended Friday’s session more than $14 above the median $155 target. The company may need to fire on all cylinders in next week’s earnings report in order to sustain this elevated placement.

Caterpillar is a cyclical play near an all-time high in the 11th year of a bull market that many believe is growing ‘long-in-the-tooth’. Traditionally, their performance tracks economic boom and bust periods, as well as developments in BRIC countries where heavy earth movers are needed for industrialization. 2020 China growth is stronger than expected after pandemic shutdowns but North America and Europe are posting sub-par numbers, adding risk for breakout buyers.

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