by Joseph Hargett | May 12, 2014 9:27 am
On the heels of solid reports from Caterpillar (CAT) and Agco Corp. (AGCO), agricultural equipment manufacturer Deere & Co. (DE) has its work cut out for it when it slips into the earnings confessional ahead of the open this Wednesday.
With the consensus targeting a second-quarter profit of $2.40 per share, the current rally in Deere stock hangs in the balance. Taking a closer look at expectations, however, Wall Street targets might be a bit higher. Specifically, Deere’s whisper number arrives at $2.64 per share, according to WhisperNumber.com.
Historically, DE has had little trouble topping the consensus estimate. In fact, Deere has bested Wall Street’s targets in each of the prior four reporting periods by an average of more than 12%. Still, the brokerage community is far from onboard.
For instance, data from Thomson/First Call reveals that 19 of the 23 analysts following Deere stock rate the shares a “hold” or worse. Furthermore, the current 12-month price target for DE stock rests at $88 — a discount to Friday’s close at $94.34.
Shares also have attracted a following among short sellers. Currently, some 16.2 million shares of Deere stock are sold short, accounting for nearly 5% of the stock’s total float, or shares available for public trading. While not overwhelming, this short position could be enough to provide fuel for a modest short-covering rally in the event of a positive report.
Judging from Deere options activity, some of these short sellers may be hedging their bets. In the May/June series of options, DE stock has attracted 58,004 calls and 41,318 puts, resulting in a put/call open interest ratio of 0.71 – a comparatively low reading for Deere. Zeroing in on the May options, which will be more dramatically impacted by this week’s earnings report, the put/call open interest ratio falls to 0.69, hinting at a more bullish bias in relation to Deere stock’s post earnings reaction.
Click to Enlarge Overall May option implieds on Deere stock are pricing in a potential post-earnings move of about 2.6%. This places the upper bound near $96.46, while the lower bound lies at $91.54. Technically, key support lies in the $90-$91 region, with Deere’s 50-day moving average rising through the area. On the upside, resistance emerges in the $95-$96 area, with a move to the upper bound placing Deere stock in multi-year high territory.
Traders looking to position themselves ahead of Deere’s quarterly report might want to consider going with the flow in the options pits, and opening a bull call spread.
At last check, the June $92.50/$97.50 bull call spread was offered at $2.32, or $232 per pair of contracts. Breakeven lies at $94.82, while a maximum profit of $2.68 is possible if Deere stock closes at or above $97.50 when June options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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