by Ian Harvey
IMPORTANT NOTE: There is no stop-loss or pre-determined sell price recommended – this is left to the discretion of the individual trader.
Option Trade – Deere & Company (NYSE:DE) Calls
Thursday, February 16, 2017
**OPTION TRADE: Buy the DE MARCH 17 2017 115.000 call at approximately $1.10. Sell price is left to your own judgment.
Deere & Company (NYSE:DE), engaged in equipment operations, is expected to report its fiscal first-quarter numbers before the market open on February 17. Analysts are calling for earnings of 51 cents per share on revenue of $4.62 billion. The stock has trended sharply higher since the presidential election, and shares are currently up 5.9% since the beginning of the year.
Enthusiasm is running higher for Deere with the current outlook looking strong, especially for the companies based on President Trump’s intentions to boost infrastructure spending to spur the economy, and his ambitious plan to build a wall on the Mexican border. Each of these ambitions should result in stronger demand for the Deere’s heavy machinery.
The stock has enjoyed major gains since the November election. Deere announced its 4Q16 earnings on November 23, 2016. Between then and February 13, 2017, it gained 20.40% and outperformed its peers. Caterpillar (CAT), AGCO (AGCO), and CNH Industrial (CNHI) returned 5.2%, 18.1%, and 16.2%, respectively. Deere also outperformed the broad-based SPDR S&P 500 ETF (SPY) that tracks the S&P 500 Index (SPX). SPY returned 5.5% during this period.
Deere stock continued to rise after it repeatedly beat analysts’ consensus estimate in previous quarters. The stock’s strong performance was mainly driven by cost savings and productivity measures that Deere announced during its 4Q16 earnings. In the past three months, Deere upgraded and introduced new products hoping to improve sales in its equipment division.
DE has a P/E of 22.8, and analysts expect to see earnings growth of 16.4% during the year. Of course, those estimates could be grossly understated depending on how quickly President Trump starts to move on his plans, assuming he is able to do so.
Wall Street is incredibly bullish on the stock, and the company has a solid earnings track record, posting better than expected earnings in each of the last 16 quarters, and revenue beats each of the last four quarters.
Look for another solid report, and the stock to move higher in reaction.
The Reasoning behind the Trade
Deere has outpaced the Consensus Estimate in each of the trailing four quarters, with an average earnings beat of 58.17%.
Even though low commodity prices and stagnant farm income will continue to dent Deere's equipment sales, the company will benefit from cost saving efforts. These include indirect and direct material cost reduction by leveraging supplier relationships, resourcing and product redesign. Further, reduced headcount, chiefly on the back of voluntary separation initiatives, changes to variable pay structure, lower R&D spending and decreased depreciation related to lower capital investment will lead to lower costs.
Further, the company will benefit from the improving trends in construction.
The stock has outpaced the categorized Machinery-Farm industry, in the past three months. The stock has gained 20.3% while the industry has witnessed an increase of 19.6% in the past three months.
Deere shares have rallied sharply since the U.S. presidential election, as hopes about a rebound in manufacturing continue to rise.
Aegis Capital analyst Igor Maryasis noted that the sector has become less pessimistic, with both farmers and equipment dealers adjusting to the cycle after years of challenges. "We've seen the mood, especially among dealers, beginning to improve somewhat in the fall of 2016 and there appears to have been another notable step upward following November elections," Maryasis wrote in a research note ahead of earnings.
Analysts and Hedge Funds
Wells Fargo analyst Andrew Casey believes that North American and European equipment trends will improve in 2017, even if they're at relatively weak levels. "While December farm equipment demand trends remained weak, we continue to believe Europe demand will likely begin to improve mid-2017 and North American demand will bottom during 2017," Casey wrote in a note ahead of earnings.
Morningstar analyst Keith Schoonmaker believes that the company can maintain its margins of around 12%, thanks to pricing strength. "Notably, this performance is still better than what we forecast for competitors AGCO and CNH, owing to Deere's wide economic moat rating and recent success with new products in South America (where Deere has enjoyed market share gains)," Schoonmaker wrote in a research note ahead of earnings. Morningstar has a $104 price target on shares.
On January 19, 2017, Credit Suisse (CS) raised Deere’s target price to $132 from its previous target price of $120. It implies a 12-month return of 19.2% based on the closing price of $110.75 on February 13, 2017.
Over the past 12 months, shares of Deere have gained nearly 38%, compared to the near 22% gain in the S&P 500.
Deere & Company stock’s 50 day moving average price is $106.58 and its 200-day moving average price is $93.09. Deere & Company has a 12 month low of $74.91 and a 12 month high of $112.18. The stock has a market cap of $34.87 billion, a price-to-earnings ratio of 22.88 and a beta of 0.73.
Option Trade – MGM Resorts International (NYSE:MGM) Calls
Wednesday, February 15, 2017
** OPTION TRADE: Buy the MGM
MARCH 17 2017 30.000 call at approximately $0.55.
MGM Resorts International (NYSE:MGM), is one of the world's leading global hospitality companies, operating a portfolio of destination resort brands including Bellagio, MGM Grand, Mandalay Bay and The Mirage, will release the Company's financial results for the fourth quarter and full year 2016 before the market opens tomorrow, Thursday, February 16, 2017. The consensus calls for earnings of $0.17 per share on revenue of $2.41 billion.
Last quarter, MGM Resorts posted a momentous 625.00% positive earnings surprise. In fact, the company posted positive earnings surprise in three of the last four quarters, with an average beat of 139.40%.
MGM has enjoyed nice gains over the last year, as conditions improve in both Las Vegas and Macau. The stock has been stuck in a sideways trend over the last three months, a result of the stock’s valuation. MGM has traded to a P/E of 54.7, which is high, but analysts do expect earnings growth of 19% during the year.
The street is very upbeat on the recent quarter, with a whisper number of 20 cents per share, versus the consensus 17 cents. One of the names in the sector has already reported, with Wynn Resorts (WYNN) topping estimates.
Equities research analysts at CLSA increased their FY2017 earnings per share (EPS) estimates for shares of MGM Resorts International in a research note issued to investors last Thursday. CLSA analyst J. Oh now anticipates that the firm will post earnings of $1.48 per share for the year, up from their prior estimate of $1.23.
Influencing Factors to Consider
MGM Resorts’ earnings in the to-be-reported quarter are expected to benefit from higher demand at its properties in Las Vegas on the back of improving employment rate trends and increasing tourism numbers in the region. With the Las Vegas Strip recording high occupancy rates, the company has been witnessing a solid rise in resort revenues, which should continue to boost the top line.
Moreover, the diversification of its resort portfolio and non-gaming options is likely to propel fourth-quarter revenues as well. Particularly, the opening of MGM National Harbor, a casino resort, on Dec 8, 2016, should drive revenues. Additionally, the company’s profit growth plan is also poised to increase the quarter’s profits.
MGM Resorts’ revenues, however, have been hurt by its sluggish performance in Macau over the past few quarters. Nevertheless, per the Macau Gaming Inspection and Coordination Bureau, gross gaming revenues (GGR) rose in all the three months of the quarter, thereby continuing the revival in Macau. We thus expect the company’s performance in the region to get a boost in the to-be-reported quarter.
JPM analysts Joseph Greff, Daniel Politzer, Nicholas Leibold and Brandt Montour, who have an overweight rating on the stock, expect fourth quarter net revenue from the Las Vegas strip to rise 4% year on year and a 2% decline in Macau. But they expect adjusted earnings before interest, taxes, depreciation and amortization (Ebitda) to rise 13% overall, with a rise of 13% in Vegas and 11% in Macau, after royalties. They have a $39 price target on the stock, implying upside of 36%. Two excerpts from their earnings preview report:
” … We continue to believe that MGM possesses the best risk-reward in gaming, with ~65% of its cash flows coming from the Las Vegas Strip (and only ~10% exposure to Macau), a market with no new supply growth and group/convention momentum, which should allow it to garner continued attractive (and above U.S. lodging industry) overall room pricing and non-gaming, out of the room spend growth aided by incremental EBITDA coming from the T-Mobile Arena and Park related investments …
Our 4Q Macau property level EBITDA estimate could be somewhat aggressive (J.P. Morgan estimate: $145 million versus consensus $133 million) given our interpretation of Wynn Resorts (WYNN) GGR [gross gaming revenue] share gains, but given that Macau is just 9% of MGM’s adjusted EBITDA and dependent on its one property in Macau, we think investor expectations seem set appropriately low …”
Instinet reissued a “buy” rating and issued a $35.00 price objective on shares of MGM Resorts International in a research note on Tuesday, February 7th.
One investment analyst has rated the stock with a hold rating and twenty-four have issued a buy rating to the company. The company presently has a consensus rating of “Buy” and an average price target of $32.37.
MGM Resorts International has a 52 week low of $17.34 and a 52 week high of $30.62. The company’s 50-day moving average price is $28.97 and its 200 day moving average price is $26.91. The company has a market capitalization of $16.36 billion, a PE ratio of 54.66 and a beta of 1.66.
Option Trade – Marriott International Inc. (NASDAQ:MAR) Calls
Tuesday, February 14, 2017
**OPTION TRADE: Buy the MAR MARCH 17 2017 90.000 call at approximately $1.00. Sell price is left to your own judgment.
Marriott International, Inc. (NASDAQ:MAR) reports its earnings tomorrow, after the market closes. The estimated EPS for the current quarter is said to be $0.83. Following Earnings result, share price were UP 17 times out of last 27 Qtrs.
The stock has added about 22.5% since it reported its last earnings. The Closing price of Marriott International, Inc. at Last Earnings was $70.83 as compared to the previous closing price of $87.38.
By Looking at Earnings History, Out of 12 Quarters when the Earnings were reported, Marriott International, Inc. beat earnings by 91%.
For 2016, analysts are estimating Marriott’s revenue to rise 12.5% to $16.3 billion. That’s higher than growth in the past three years. Increasing RevPAR (revenues per available room) and growing fee income have made this possible.
Marriott completed its merger with Starwood Hotels & Resorts in 3Q16. Some of Marriott’s growth is attributed to this acquisition.
For 2017, growth is expected to be 25.0%, mainly as the year receives the benefit of the Starwood acquisition. The combined entity is expected to have sales of $20.4 billion.
The Reasoning behind the Trade
Marriott’s merger with Starwood is expected to result in cost savings of $250.0 million. Most of the savings will come from cutting top executive jobs.
Also, Marriott's increased scale and a robust development pipeline post Starwood purchase bodes well. Increasing business and leisure travel on the back of an improving economy and positive employment numbers along with higher transaction volumes should further boost the quarter's results.
Additionally, the company's investments in technology for hotel bookings would improve guest experience, which in turn is expected to boost occupancy in the fourth quarter.
Analysts and Hedge Funds
Many analysts upgraded MAR stock after 3Q16. In December 2016, MKM Partners upgraded the stock from a “neutral” rating to a “buy.” In September 2016, Goldman Sachs gave the stock a “buy” rating and initiated coverage. Morgan Stanley also upgraded the stock in September from “equal weight” to “overweight.”
As well, Marriott International was upgraded by analysts at Vetr from a “buy” rating to a “strong-buy” rating in a research note issued last Thursday. The firm presently has a $94.74 price objective on the stock. Vetr‘s price target indicates a potential upside of 10.87% from the stock’s current price.
According to a Reuters consensus, of the 28 analysts tracking Marriott International (MAR), five of them (18.0%) have a “strong buy” for the stock, and nine (32.0%) have a “buy” recommendation. Twelve analysts (43.0%) have given the stock a “hold” rating, and one analyst (4.0%) has given it a “sell.” The remaining one analyst (4.0%) has recommended a “strong sell.”
Cleararc Capital Inc. boosted its position in shares of Marriott International by 0.4% during the fourth quarter, according to its most recent 13F filing with the SEC. The firm owned 7,897 shares of the company’s stock after buying an additional 34 shares during the period. Cleararc Capital Inc.’s holdings in Marriott International were worth $653,000 at the end of the most recent quarter.
Marriott International has a market capitalization of $34.10 billion, a price-to-earnings ratio of 31.09 and a beta of 1.22. The stock has a 50-day moving average price of $84.07 and a 200-day moving average price of $75.50. Marriott International has a one year low of $60.87 and a one year high of $87.34.