Betting Against the Farm Part Two- Buy Puts on Deere (NYSE: DE) and Lindsay (NYSE: LNN)
*Please note, the futures are down 9 points as of this post. I’ve suggested price limits slightly above the median close but you might have luck being patient if the market rallies.
Buy to open the January 18, 2019, put on Deere (NYSE: DE) with a strike price of $145 at $6.70 or lower. Symbol (DE190118P145)
Buy to open the December 21, 2018, put on Lindsay Corp (NYSE: LNN) with a strike price of $95 at $2.65 or lower. Symbol (LNN181221P95)
There’s trouble on the farm. We’ve had several iterations of this trade in the past. The news just keeps getting worse for farmers’ bottom lines. Although it is possible there’s some melting of the trade freeze between the U.S. and China at the G-20 (begins on November 30), the draconian drop in income to farmers from tariffs is bound to reverberate through the farming supply chain.
Deere (NYSE: DE) will lap its $5 billion purchase of German equipment manufacturer, Wirtgen, in the fourth quarter (ends January 2019). I expect the company to provide weak guidance for that quarter when it reports third-quarter earnings on November 27.
- Most of Europe is seeing a slowdown in economic growth. Combined with political angst regarding German Prime Minister Angela Merkel and Brexit, there is a significant risk that capital spending slows.
- Despite 50% of sales split around the globe, the diversity is not helping. U.S. farmers’ incomes are wilting due to soybean tariffs and low poultry prices. Agriculture sales are exposed to this weakness.
- Road and construction sales, which have been boosted due to the Wirtgen purchase, should slow due to log jammed budgets both here and abroad.
- Deere’s financing arm is a major driver of its profits. The percent of non-current receivables and those 30-59 days past due is creeping up. Recent jumps in interest rates may crunch this profit center.
- Deere’s trailing 12-month cash flow fell 30% last quarter and has dropped in the last five quarters. Free cash flow (cash generated after subtracting capital expenditures) was negative $2 billion.
Lindsay (NYSE: LNN) fell 9% to $90 late last month when it missed revenue and earnings estimates. The stock rebounded to $107 on hopes of infrastructure funding but then fell to $99 on a harsh downgrade. Even after that drop, the stock still trades with a heightened P/E despite significant uncertainty in its future earnings.
The instigator for the current earnings miss is the company’s road construction products. I expect earnings to fall even more when profits from its agricultural irrigation equipment begin to unwind.
Lindsay won’t report its next quarter until early January but I expect the stock to fall in sympathy with other agriculture stocks.