Tuesday 29 January 2013

Caterpillar (CAT) ... calls seem the way to go

US macro data has been on the up for a while. Who knows, the risks may even be skewed to positive surprised for Europe and China? Although that may be a long shot. I noticed that Caterpillar (CAT US, mkt cap $64bn) yesterday announced its Q4 numbers. 2012 was a record year. The mood for the 2013 outlook was wary ... "The range of our 2013 outlook reflects the level of uncertainty we see in the world today." However, it goes on to suggest that "If the recent improvement in economic indicators continues, 2013 could be another record year for Caterpillar." 

Back in September last, I picked out United Rentals (URI US, mkt cap $4.7bn) as a worthy long at $34/shr (URI link). It’s rallied to $51/shr. I liked URI as its peer, Ashtead (AHT LN, mkt cap £2.3bn), had already gone gangbusters (and continues to). I also liked the US cyclical recovery aspect of it, and its value. I like CAT for similar reasons. If the US equipment rental providers are experiencing better levels of activity, at some stage this should filter through to outright purchases. So the US is likely to present reasonable demand and CAT reckons that China will begin to improve also.

CAT trades at a fairly undemanding 10x next year’s earnings and 8x on an EV/EBITDA basis. Further the Call options for May at strikes between $110-120/shr appear to me to be remarkably cheap for a stock whose price can move quickly. Via ETX Capital the $110 strike for May can be bought for 79 cents, the $115 for 35 cents and the $120 for 17 cents. So I trousered a stack of them.

And another thing ...
I also like the chart, which looks as though a W-pattern may be in progress and the fact that the brokers are now talking the stock up. 

CAT share price
Source: Bloomberg
CAT vs. United Rentals
Source: Bloomberg
CAT valuation, forward P/E and EV/EBITDA
Source: Bloomberg
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