Caterpillar turns bearish on trimming fiscal 2016 outlook

Construction and engineering equipment manufacturer Caterpillar (CAT) reported its fiscal 2016 first-quarter earnings, which fell short of analysts’ estimates by a narrow margin. However, the first-quarter revenue was above the consensus estimate. A trader can expect the share price, which closed at $76.79 on Monday, to go down further due to the following reasons.

For the fiscal 2016 first-quarter, the company reported revenue of $9.46 billion, down 25.5% from the prior year similar period. The revenue estimate of analysts’ was $9.39 billion. The first-quarter earnings fell to $0.46 per share, from $2.07 per share in the prior year similar period. Caterpillar’s adjusted first-quarter earnings of $0.67 per share missed analysts’ estimates of $0.68 per share. The company attributed the poor performance to 43% decline in the Latin American sales.

The majority of mining equipment demand is from oil companies. With no firmness in the oil prices, the company does not anticipate any recovery until the end of this year. Particularly, in the case of Brazil, Caterpillar has called for urgent fiscal reforms and co-operation from political parties.

Caterpillar Inc.

The company is facing a consecutive fourth year of decline in sales due to slowdown in China, Brazil and Russia. Caterpillar was also forced to reduce the price of its equipment to maintain the sales volume.

Considering the gloomy scenario, the company trimmed its fiscal 2016 revenue and earnings guidance. For the fiscal 2016, Caterpillar trimmed the lower end of the previous revenue guidance range of $41 billion to $42 billion. The company now expects fiscal 2016 revenue in the range of $40 billion to $42 billion. The guidance was cut mainly because of slowing demand from the mining and transportation sectors.

Similarly, the company now expects earnings per share of $3 for the fiscal 2016, compared to $3.50 announced earlier. Excluding restructuring costs, Caterpillar’s profit outlook is currently $3.70 per share, down from the previous guidance of $4 per share.

For the fiscal 2016, the company also anticipates restructuring costs to increase to $550 million, from the earlier announcement of $150 million. Thus, fundamentally, the share price would remain range bound with bearish bias in the short-term.

Technically, the chart shows minor support for the stock at 76.80 and major support at 70 levels. The stochastic reflects an overbought state. Thus, a trader can expect the share price of Caterpillar to drop below 76 in the coming days.

With such a possibility, a one touch put options contract should be the ideal one to capitalize on the downward trend of the stock. A strike price close to $74 will benefit the trade. Furthermore, the trader should choose the expiry time in the last week of May.