Deere and Company (DE) leads the world in the manufacturing of agricultural and forestry equipment (by revenue). But also produces equipment for construction, lawn care, and miscellaneous heavy equipment dealing with construction and farming.
The housing market has an influence upon Deere's income. Lawn trackers, mowers, yard equipment and other landscaping equipment is bought when the housing market does well.
In a recent article in Bloomberg by Christie Harvey, it was pointed out that home buyers are becoming more confident that the U.S. real estate market will begin a steady recovery. She goes on to write:
"Sixty percent of people surveyed last month had positive views about the housing market and 70 percent expected property values to improve over the next two years."
Housing starts for February came in a bit weaker than expected, but January was much higher. And there is a good chunk of 'big money' going into housing right now. SAC Capital, Blackstone and Caxton Associates as among the funds making big bets on homebuilders, like Beazer Homes (BZH) and Pulte (PHM). The combination of low interest rates and declining prices since 2006 have lifted interest in buying again.
Not only is the housing industry slowly recovering, but bad weather in Eastern Europe (Poland and Ukraine in particular) has hurt the winter wheat crop. U.S. farmers, should end up with more money to spend on equipment do to increased sales. This should make a good season for the whole Ag industry.
We are bullish on Deere through the growing season and because of this are going to take advantage of the perceived move with a Bull Call Spread.
The Options Play
Analysts have pegged Deere for a possible rise to about 94.5. Because of this we will make a trade within this price range.
- Buy a January 2012 '82.50' call option (priced at $7.35)
- Sell a January 2012 '85.00' call option (priced at $6.05)
- Net Debit to Start: $1.20
- Maximum Profit: $1.30
Reasoning behind the Trade
- The trade is well within the analyst's price range.
- Housing market continues to recover and this affects Deere's price.
- Poor weather in Poland and Ukraine could mean sales for American farmers and increased revenue for Deere in equipment sales.
- January spread, being the same as September gives us added protection of time decay.