As earnings season winds down, there’s one last major industrial bellwether left to report. I’ll show you how I analyze a company fully before results and come to the best options strategy. Deere (DE) , headquartered in Moline, Illinois, manufactures agricultural machinery, heavy equipment, forestry machinery, diesel engines, and related components. The company also operates a financing arm. One of the oldest companies in the United States, Deere traces its history back to John Deere’s “self-scouring plow” in 1837. However, the company is likely best known for its ubiquitous green tractors and combines — 60% of the company’s revenues come from its agricultural equipment sales and to a lesser extent from its construction equipment such as backhoes, bulldozers, and excavators, where they compete with companies like Caterpillar. While most Americans are likely familiar with John Deere equipment, they might be surprised to learn that since the lows of the pandemic plunge on March 23, 2020, Deere & Company (DE) has been an exceptional investment with a total return, including dividends of nearly 231% through Friday, outperforming S & P 500 by an impressive 76% and the Nasdaq-100 by more than 56%. DE 5Y mountain Deere, 5 years During the pandemic, an agricultural equipment super cycle drove this outperformance. From the pandemic lows to the 2022 highs, the two largest U.S. cash crops, soybeans and corn, boomed, boosting farm revenues enormously. While many farm expenses also rose significantly during the period, fertilizer costs rose by ~$100 per acre; for example, overall farm revenues grew significantly. To understand why, consider if corn prices were, on average, about $3 higher per bushel in 2022 than they were in 2020, that would translate to an increase of more than $500 per acre for a corn farmer assuming ~180 bushels per acre. As the price increases in percentage, soybean yields per acre are lower. However, even assuming 50 bushels per acre and a $5/bushel average price increase, the revenue per acre would have risen by ~$250/acre. In either case, the per-acre fertilizer price increases were more than offset. These revenue increases also occurred during record-low interest rates. Farmers could, in some cases, fully deduct the purchase price of new equipment the year it was placed in service, encouraging accelerated equipment purchases when crop revenues are high. The combination of well-above-average crop prices, record low interest rates, and tax treatment encouraging equipment purchases during “fat years” led to record sales. Record demand and depleted inventories helped preserve or expand net income margins, which grew from 8-9% pre-pandemic to ~14% more recently. The problem is that these factors, sharply increasing farm revenues, low interest rates, and tax treatment that encouraged farmers to invest in new equipment, a boon for Deere & Company and other agricultural equipment manufacturers, have since reversed and become a headwind. Corn and soybean prices, as well as interest rates, are back to pre-pandemic levels. However, while Deere & Company stock has underperformed the S & P this year, its enterprise value is nearly $100 Billion, almost double the company’s valuation in January 2020, just before the pandemic. The trade Suppose one looks at trailing financial results or current expectations for future results. In that case, the company does not look overvalued, trading at less than 11 times trailing 12-month earnings and ~14.5 times FY2025 earnings estimates, yet technically, the stock looks quite weak. Of the 22 top technical indicators (a list too long to recite here), only five offer bullish signals, whereas 17 are bearish. Why? I offer two possible explanations. 1) the price action reflects investor expectations that revenues for FY2025 of ~$45 Billion are optimistic, and/or 2) expectations of 14.5% net income margins are optimistic. The company is taking steps to preserve margins, announcing new manufacturing in Mexico and layoffs in the United States of ~2,000 of its 83,000 employees. Still, if revenues and margins fell back to pre-pandemic levels, EPS could fall well below the ~ $ $24/share street consensus. Unsurprisingly, DE options are pricing in a larger-than-average 6% move when the company reports earnings on Thursday. The street forecasts a sharp revenue decline, even sharper than those recently reported by Deere’s smaller competitors, CNH Industry (Case New Holland) and AGCO (Massey Ferguson), which experienced ~ 15% YoY revenue declines. Still, the price action and the fundamental backdrop do not make me positive about Deere in the short term, even though I generally like the company and its products. Consequently, if one owns the stock or if one is inclined to make a neutral to modestly bearish bet through earnings, one might consider selling an upside call spread such as the September $360/$370 call spread, which, as of Friday’s prices, could be sold for ~$3.30, or 33% of the $10 difference between the strikes as follows. The trade: Sell Sep. 20 $360 call Buy Sep. 20 $370 call DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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