Options Trade – Deere & Company (NYSE:DE) Puts
Monday, February 10, 2014

**OPTIONS TRADE: Buy the DE Jun 2014 80.000 put (DE140621P00080000) at or under $1.90, good for the day. Place a protective stop limit at $0.75 and a pre-determined sell at $3.50.

by Ian Harvey

February 10, 2014

Introduction

Deere & Company (NYSE: DE) will report fiscal first quarter results before the market opens on February 12. The stock has traded lower along with the overall market, having lost 6.0% in 2104. Wall Street has forecast earnings of $1.53 per share, down from $1.65 during the same period last year.

Weakness in the mining industry has hurt heavy machine manufactures like Deere, but the entire sector got a boost from Caterpillar's (CAT) recent earnings report. The company posted a 44% year over year earnings increase, sending the stock higher. Deere traded higher along with CAT, but there should be a great deal of caution needed about reading too much into the CAT report. The mining industry remains challenging, and a big reason why CAT had such a strong quarter was aggressive cost cutting, not resurgence in its underlying business.

DE is the second largest manufacturer of construction equipment, and the housing recovery should help this segment of its business, but the real trouble is its farming business. The company is the largest maker of agricultural equipment, and this segment accounts for around 75% of its total sales. This is where it is expected that the real weakness will show. Commodity prices have been weak, and as a result farmers have been purchasing fewer tractors.

Deere reported in November that it expects its business to suffer in 2014 due to lower commodity prices. Lower prices lead to lower farm receipts, so it is easy to see how this would impact DE's main business.

Company Details

Deere & Company (John Deere) along with its subsidiaries operates in three segments: agriculture and turf, construction and forestry and financial services.

The John Deere agriculture and turf segment manufactures and distributes a line of agricultural and turf equipment and related service parts.

John Deere construction, earthmoving, material handling and forestry equipment includes a range of backhoe loaders, crawler dozers and loaders, four-wheel-drive loaders, excavators, motor graders, articulated dump trucks, landscape loaders, skid-steer loaders, log skidders, log feller bunchers, log loaders, log forwarders, log harvesters and a range of attachments.

The financial services segment primarily finances sales and leases by John Deere dealers of new and used agriculture and turf equipment and construction and forestry equipment.

In December 2013, the Company sold a majority interest in its landscapes business to the private equity investment firm of Clayton, Dubilier & Rice, LLC.

Key Statistics for DE

Current P/E Ratio (ttm) 9.4419
Estimated P/E(10/2014) 10.3690
Relative P/E vs. SPX 0.5684
Earnings Per Share (USD) (ttm) 9.1677
Est. EPS (USD) (10/2014) 8.3480
Est. PEG Ratio 1.4012
Market Cap (M USD) 32,145.54
Shares Outstanding (M) 371.37
30 Day Average Volume 2,791,121
Price/Book (mrq) 3.1519
Price/Sale (ttm) 0.8953
Dividend Indicated Gross Yield 2.36%
Cash Dividend (USD) 0.5100
Dividend Ex-Date 12/27/2013
5 Year Dividend Growth 13.36%
Next Earnings Announcement 02/12/2014

Earnings

Deere & Co. last released its earnings data on Wednesday, November 20th. The company reported $2.11 earnings per share for the quarter, beating the analysts’ consensus estimate of $1.89 by $0.22. The company had revenue of $8.62 billion for the quarter, compared to the consensus estimate of $8.68 billion.

During the same quarter last year, the company posted $1.75 earnings per share. Deere & Co.’s revenue was down 4.7% compared to the same quarter last year. On average, analysts predict that Deere & Co. will post $8.33 earnings per share for the current fiscal year.

Analysts Opinions

Deere & Co. (NYSE:DE) has been given a consensus rating of “Hold” by the twenty-two analysts that are currently covering the company. Seven investment analysts have rated the stock with a sell recommendation, twelve have issued a hold recommendation and three have given a buy recommendation to the company. The average 1-year price target among brokers that have covered the stock in the last year is $90.71.

Also, Deere & Co. has been the subject of a number of research reports:-

• Analysts at Barclays raised their price target on shares of Deere & Co. from $93.00 to $101.00 in a research note to investors on Monday, January 13th. They now have an “overweight” rating on the stock.

• Separately, analysts at Zacks reiterated a “neutral” rating on shares of Deere & Co. in a research note to investors on Friday, December 20th. They now have a $94.00 price target on the stock.

• Finally, analysts at BMO Capital Markets downgraded shares of Deere & Co. from an “outperform” rating to a “market perform” rating in a research note to investors on Monday, November 25th. They now have an $84.00 price target on the stock.

Analyst Firms Making Recommendations

ARGUS RESEARCH B OF A M L
BAIRD R W BARCLAYS CAPITA
CLSA AMERICAS CO FORECST
EDWARD JONES GOLDMAN SACHS
J.P. MORGAN JANNEY MONT.
JEFFERIES & CO. LONGBOW RESEARC
MACQUARIE CAPIT MORGAN STANLEY
PIPER JAFFRAY UBS
WELLS FARGO SEC WILLIAM BLAIR

Conclusion

Any sign of weakness in the earnings report will exacerbate the current bearish tone, and could result in a major drop off. Lower forecast commodity prices are likely to continue weighing on the company through 2014.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the DE Jun 2014 80.000 put (DE140621P00080000) at or under $1.90, good for the day. Place a protective stop limit at $0.75 and a pre-determined sell at $3.50.



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