Deere & Company (DE) is facing some tough year-over-year comparisons as it heads into its upcoming earnings report.
DE stock is off sharply from its 2014 peak near $95 as the company deals with a marked decline in the cyclical agriculture market, with net incomes for U.S. farms forecast to fall 14% from 2013 levels. However, while this has prompted a slew of negative analyst notes and price-target revisions in DE stock, the bulls appear to be taking the reins once again.
The company is keenly aware of the troubles facing its agribusiness unit, noting during its third-quarter conference call that equipment sales should fall 8% year-over-year in the fourth quarter, with full-year sales dropping 6%. That said, a recovery taking place in the construction market could provide a positive note to Deere’s first-quarter and fiscal 2015 guidance.
Running the numbers, Wall Street is expecting a fourth-quarter profit of $1.58 per share from Deere. During the past four quarters, the company has bested the consensus target by an average of 12%. It should come as no surprise then that EarningsWhisper.com reports a fourth-quarter whisper number of $1.67 per share for Deere’s results.
The brokerage community’s optimism ends there, however. According to data from Thomson/First Call, only four of the 30 analysts following DE stock rate the shares a “buy” or better, compared to 17 “hold” ratings and nine outright “sells.” What’s more, the 12-month consensus price target of $83.50 represents a discount to yesterday’s close at $87.52. It might be safe to say that the brokerage community has already factored in declining agribusiness revenue.
Pessimism also is thick among short sellers. Currently, 36.8 million shares of DE stock are sold short, accounting for more than 11% of the stock’s total float, or shares available for public trading. If DE stock can continue its current rebound, potentially driven by positive guidance notes, it could prompt a short-covering rally.
It’s possible these short sellers are getting a bit nervous. DE stock saw rather impressive call volume yesterday, with 12,317 contracts changing hands — 217% more than the stock’s daily average call volume. But while hedging may be driving short-term call activity, it’s not been enough to change the bearish options backdrop.
Specifically, the weekly November put/call open interest ratio for DE stands at a whopping 5.81 — with put open interest more than quintupling call open interest among options set to expire at the end of this week. This ratio moderates somewhat when we focus on December options, with the put/call open interest ratio slipping to 1.73 — still a rather bearish reading for DE stock.
Click to Enlarge Overall, November implieds are pricing in a potential post-earnings move of about 2.9% for DE stock. This places the upper bound at $89.53, while the lower bound lies at $84.47. An upside move still leaves DE short of resistance at $90, while the expected decline would leave DE perched just above support at its 50-day moving average.
2 Options Trades on DE Stock
Bull Call Spreads: The current wealth of negativity levied against DE set against the stock’s current rebound makes a contrarian play rather tempting heading into earnings — especially with the potential impact of a recovery in the construction market. Those traders looking to take a chance on a DE rally might want to consider a Dec $86/$90 bull call spread. At the close of trading on Monday, this spread was offered at $1.75, or $175 per pair of contracts. Breakeven lies at $87.75, while a maximum profit of $2.27, or $225 per pair of contracts, is possible if Deere stock closes at or above $90 when December options expire.
Selling Puts: However, if you’re not comfortable with a bullish DE trade, you could look into a put sell position. For instance, a weekly Nov $80 put sell stands a good chance of finishing out of the money when these options expire at the end of this week. After the close last night, the weekly Nov $80 put was bid at 15 cents, or $15 per contract. You keep the premium as long as Deere stock closes above $80 when November options expire at the end of this week, but should DE trade below $80 ahead of expiration — a very unlikely outcome — you could be assigned 100 shares for each Nov $80 put sold at a cost of $80 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
