Betting Against the Farm- Buy Put Options on Agriculture Equipment Makers
Buy to open the August 17, 2018 put on Lindsay Corporation (NYSE: LNN) with a strike price of $95 at $3.35 or lower. Symbol (LNN180817P95)
Buy to open the November 16, 2018 put on Agco Corporation (NYSE: AGCO) with a strike price of $55 at $2.00 or lower. Symbol (AGCO181116P55)
Buy to open the September 21, 2018 put on Titan Machinery (NSDQ: TITN) with a strike price of $17.50 at $2.00 or lower. Symbol (TITN180921P17.5)
- Farmers worldwide and particularly U.S. farmers have seen their incomes squeezed for many years. 2017 farm income was flat with the prior year but 25% below the prior 5-year average. Based on its February 2018 report, the USDA projected net farm income for the calendar year 2018 to decrease 6.7% as compared to the calendar year 2017.
- This precarious financial situation will continue to hurt sales of agriculture equipment.
- China’s 25% tariff on soybeans is the final straw for U.S. farmers, sending the price of one its primary crops down to a 9-year low.
- Steel, a primary component in the manufacture of farm machinery, is seeing its price jump due to tariffs. This higher cost is also hurting profits of agriculture equipment producers.
- Lindsay reports this Thursday, June 28th before the market opens. Commentary from Lindsay may pressure the entire group and certainly will dampen its own stock if results are as disappointing as I expect.
Stock Specific Issues:
Lindsay Corporation (NYSE: LNN)
- LNN is the most timely of these options purchases. The company reports its third quarter this Thursday, June 28, before the market opens. If you are interested in these puts, the trade should be executed by the end of the day Wednesday.
- Irrigation equipment, mostly sold to farmers, makes up 81% of Lindsay’s revenue. Investors have been excited about a bump in North American irrigation revenue in the past two quarters. However, this increase seems to be simply a function of 15% declines in this business in the year-ago quarters.
- These easy revenue growth comparisons end this quarter and get more difficult in the August and November quarters.
- Inventory has been creeping up for four straight quarters, a possible indication that sales have been pushed out or been less than the company anticipated.
Agco Corp (NYSE: AGCO)
- AGCO sells equipment to farmers. Over half its sales are tractors. About one-quarter of revenue is in the U.S. where farmers are just beginning to realize their pain is getting worse. Half is from Europe, which is experiencing a slowing economy.
- AGCO’s inventories have been rising steadily for the past few quarters and now stand at 130 days of inventory, a very high level for this metric.
- Despite the company’s accounts receivable appearing to be improving, the company sells off a large portion of its receivables to a third party but retains some risk in the event of customer non-payment.
- Growth has been boosted by acquisitions for the past seven quarters. While some of this benefit will continue for the next two quarters, the underlying or organic growth has begun to slow.
Titan Machinery (NSDQ: TITN)
- Almost 60% of revenue is agriculture-related and an even greater portion of profits is generated by this customer group.
- The company’s annual cash flow has been declining since a peak of $207 in Q1 17. Last quarter this equaled $28M, the lowest level in at least 8 quarters.
- No dividend to support the stock.
- Despite 30% decline since earlier this year the stock trades for 41 times January 2019 estimates. Estimates for the following year assume a 26% increase in earnings which looks way too optimistic according to my analysis.