Last time I wrote an article on John Deere (DE) I believed the stock would be temporarily bearish and created a Bear Put Spread on the following play: (the stock was trading at 80.96 at the time.)
- Buy a June 2012 put option with an 80 strike (priced at $2.74)
- Sell a June 2012 put option with a 77.50 strike (priced at $1.84)
- Net Debit to Start: $0.90
- Maximum Credit: $1.40
Presently the stock is trading at 76.35, so reversing the position; the trade netted a profit of $0.32 per trade or an ROI of 33%.
For the 2Q of 2012 the company handily beat consensus earnings expectations. What reason did they give for this? Very good demand for farm machinery combined with global expansion that reaped a better outlook for the quarter. At the end of the quarter, there was a combination of diminishing cash flow and a surge in long term borrowing. Not a good combination if one is looking for good liquidity in a company.
But I believe the outlook for the company in the second half of this year looks really promising! There are things happening this year that work in favor for John Deere. There is an ever increasing wave of agricultural commodities and growing farm income all over the world. The U.S. Department of Agriculture is expecting better farm income as well as record corn crop this year. Supposedly the highest yield in the last 75 years! Several countries are expected to post record yields and this will activate farmers to invest in the best machinery to increase their own productivity. This will do well to help John Deere's bottom line.
Worldwide net sales for John Deere increased 12% to about $10 billion for the second quarter and 12% again for 6 months respectively. Here is the key statistic we want to look at. The company equipment sales are projected to increase by about 15 percent for fiscal 2012 and by about 25 percent for the third quarter as compared with the same period a year ago.
Looking at the huge increase in revenue projections for the third quarter, I am looking at taking advantage of a possible upswing in the stock in the fourth quarter. So I will look at a Bull Call Spread with expiration in the fourth quarter.
(click to enlarge)
The Option Play
- Buy the December call with a strike of '77.50' (priced at $6.05)
- Sell the December call with a strike of '80.00' (priced at $4.80)
- Net debit to start: $1.25
- Maximum Profit: $1.25
Reasoning behind the Trade
- Though the stock is bearish we believe it will turn around by the third quarter.
- Record crop harvests will lead to more equipment purchases for the company.
- Third quarter projections, if they come true will vault the stock sky high.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
