Pessimism was riding high on heavy machinery giant Caterpillar Inc. (NYSE: CAT, Stock Forum) heading into the company's first-quarter earnings report on Tuesday, April 21. But the Dow Jones Industrial Average component still managed to miss these lowered expectations, posting its first quarterly net loss in 16 years and indicating that full-year profit and sales would miss its previous forecast.
For the record, CAT swung to a net loss of $112 million, or 19 cents per share, from a net profit of $922 million, or $1.45 per share, a year earlier. Revenue dropped 22% to $9.23 billion. Looking ahead, the firm said that it expects a full-year profit excluding items of $1.25 per share, halving CAT's previous forecast of $2.50 per share. Meanwhile, full-year revenue is seen arriving at $35 billion, give or take 10%.
“A great deal of uncertainty exists in the global economy, making it extremely difficult to know how our customers will respond during the remainder of 2009,” CAT's Chief Executive Officer Jim Owens said in the statement.
Analyst reaction to the report has been muted, though there is ample room for brokerage firms to express their concern. Currently, CAT sports four "buys," 11 "holds," and just two "sell" ratings, according to Zacks. Any downgrades from these holdouts could apply additional selling pressure to CAT shares.
Technically speaking, the equity can ill afford bearish statements from the brokerage community. Since the beginning of the year, CAT has plummeted more than 27%, outpacing the S&P 500 Index's (SPX) decline of about 3.7%. The shares continue to fight a losing battle with their declining 10-week and 20-week moving averages, which have pressured the security steadily lower since May 2008. Furthermore, CAT is fresh off a rejection at the latter of these intermediate-term trendlines, and is poised to break below the former. If the security slips back beneath its 10-week moving average, we could see CAT drop to potential support in the 25-26 area, or even retest its March low near $22 per share.
Turning to the options pits, puts are quickly becoming the investment vehicle of choice. CAT's Schaeffer's put/call open interest ratio (SOIR) has entered a steady uptrend, rising more than 16% from its near-term low of 1.06 on April 6 to its current perch at 1.23. There is still plenty of upside potential for this ratio, as it rests in the very complacent 53rd percentile of its annual range.
Don't expect complacency to linger long, however, as data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) suggest that put buying is on the rise. Specifically, CAT's 10-day ISE/CBOE put/call volume ratio arrives at 1.82, meaning that nearly two puts have been bought to open for every call purchased on these exchanges during the past two weeks. What's more, this ratio ranks above 92% of all those taken since April 2008, pointing toward a growing appetite for bearishly oriented CAT puts.
Looking outside of the options pits, pessimism is also gaining momentum among short sellers. In fact, the number of CAT shares sold short has nearly doubled since November 2008, with short interest jumping nearly 14% during the past month. The shorts don't appear to be overly crowded either, as CAT's short-interest ratio indicates that it would take a mere 2.9 days for traders to repurchase these positions at the stock's average daily trading volume.
From a contrarian perspective, growing pessimism on an outperforming equity is a bullish indicator. For an underperforming stock such as CAT, this rising negativity is par for the course. Furthermore, the company's poor turn in the earnings confessional could embolden these bearish investors, thus increasing the degree of selling pressure on CAT. As such, the path of least resistance for the equity remains to the downside.
By Joseph Hargett