Wednesday, May 19, 2010

Earnings: Deere & Co. Beats, Raises (DE)

In early pre-market trading the stock is up $1.39 at $58.55.
Because of the overall market I've been reluctant to point out some of the positive developments we've seen for the equipment makers. In Deere's case there was also the gap up in the chart from the last earnings release:

There was no reason to chase the stock.
From the link-vault comes a Bloomberg story that caught our collective eye back on April 9:

Deere Shortage Prompts Kansas Farmer to Buy Dragotec

Jay Armstrong just broke a 50-year family tradition at his Kansas farm: He bought his first major piece of equipment that wasn’t from Deere & Co. Production cuts and the tightest inventories in the industry have led to a shortage of Deere’s signature green-and- yellow equipment that may be pushing customers to rivals. Armstrong this year ordered a combine attachment from Dragotec USA Inc. that will arrive in May. He said the same part from Deere wouldn’t have been delivered until August....MORE
From Schaeffer's Research, yesterday:

A Deere & Co. Synthetic Long Ahead of Earnings

Options trader opens a bullish options position ahead of DE's quarterly report

Deere & Co. (DE) is slated to release its quarterly earnings report ahead of the open tomorrow morning. Currently, analysts are looking for a profit of $1.09 per share from the company, which is down from earnings of $1.11 cents per share in the same quarter last year. Historically, DE has topped the consensus estimate in each of the prior four reporting periods, sporting an impressive average upside surprise of 158%.

Options traders are attempting to take advantage of the situation, with volume soaring to more than 10,000 contracts. So far, traders are centering on the May 55 put and call, with about 2,200 contracts changing hands at each strike. However, it was some unusual activity on both sides of the June 60 strike that caught my attention. At about 2:21 p.m. Eastern time, a block of 90 June 60 calls traded on the International Securities Exchange (ISE) for the ask price of $1.80, or $180 per contract. These blocks were marked "spread." The other half of this trade took place on the June 60 put, where 90 contracts traded at the same time on the same exchange for the bid price of $4.13. These contracts were also marked "spread." Given this data, it would appear that we are looking at a synthetic long position on Deere & Co.

DE June 60 call and put volume details

The Anatomy of a Deere & Co. Synthetic Long Position

Before we get into the particulars, a synthetic long attempts to replicate stock ownership as closely as possible. The trader buys at-the-money calls and sells at-the-money puts in equal numbers at the same strike with the same expiration date. By using options, the trader gains considerable leverage, allowing for greater returns on the position than those that would be achieved by investing the same amount of money in a stock position....MORE

Finally here are some early takes on today's earnings release:

WSJ: "Deere Earnings Jump 16%, Raises Forecast"

Des Moines Register: "Construction equipment sales boost Deere earnings"

Bloomberg: "Deere Profit Tops Estimates on Farm-Equipment Demand"

There is one big macro negative. As was pointed out in "...Caterpillar Growth Threatened by Stronger Dollar" (CAT)" last week and by Bloomberg on May 5: "Deere, Agco Equipment Sales May Drop as Euro Falls"