NEW YORK (TheStreet) -- You should not ignore Caterpillar (CAT) - Get Report and what the long-term chart is suggesting to chartists. Cats are supposed to have nine lives, but CAT may have used up too many lives the past five years.
CAT has been trending lower the past 12 months, but it still gapped lower this morning. Though some technical argument could be made that today's selling could be a selling climax, we want to put a different spin on this price action.
Aside from a three-week dip below $80 back in 2011, that level has represented important support for CAT. CAT broke the $80 level in July and rallied back to $80 and failed in August. Prices have continued to erode before today's announcements and downside gap. If this gap is filled quickly and prices rally, it might be considered an exhaustion gap -- the sellers have been exhausted and dumped their shares of CAT at what may prove to be a bottom. If volume today is extremely heavy, we could embrace that idea, but it doesn't appear to be heavy right now.
If we haven't reached a selling climax for CAT, then the question is, "What's next for this Dow component?"
In the 10-year chart of CAT above, we can see what happened in 2008 after CAT held the $60 level several times. Now look at the 2011-2015 price action and the many times that the $80 held. Now that prices have decisively broken this key support, we could see CAT retest next support from 2010-2011 in the $60-$50 area. A further $10 decline in CAT will not help the struggling Dow Industrials find a fall bottom.
Separately, TheStreet Ratings team rates CATERPILLAR INC as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:
"We rate CATERPILLAR INC (CAT) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its reasonable valuation levels, expanding profit margins and notable return on equity. However, as a counter to these strengths, we also find weaknesses including generally higher debt management risk, weak operating cash flow and a generally disappointing performance in the stock itself."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- 35.04% is the gross profit margin for CATERPILLAR INC which we consider to be strong. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 5.76% trails the industry average.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Machinery industry and the overall market on the basis of return on equity, CATERPILLAR INC has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
- Net operating cash flow has declined marginally to $2,088.00 million or 6.66% when compared to the same quarter last year. Despite a decrease in cash flow of 6.66%, CATERPILLAR INC is in line with the industry average cash flow growth rate of -13.94%.
- The debt-to-equity ratio is very high at 2.24 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Along with the unfavorable debt-to-equity ratio, CAT maintains a poor quick ratio of 0.95, which illustrates the inability to avoid short-term cash problems.
- You can view the full analysis from the report here: CAT