The Best Trade on Ethanol Growth
September could bring a “huge potential catalyst” for the ethanol business, Cramer said Wednesday, and Deere is the way to play it.
Here’s the background: Congress has directed the Environmental Protection Agency to make it possible for 21 billion gallons of renewable fuels to be sold in the US in 2015, up from 12.9 billion this year, and much of the increase is expected to come from corn-based ethanol.
In order to reach that level, the EPA said it would need to increase the blend of ethanol in gasoline to 12% from 10% while studying the effects on cars of a longer-term increase to 15%. The final decision is expected late next month, and given that the EPA said the initial tests in June looked good, Cramer expects still more good news in just over a month.
But rather than recommend a pure play on ethanol, which Cramer would most likely never do because those stocks are too risky, he thinks Deere is the one to buy. After all, without the farming necessary to grow corn, there would be no ethanol.
“And when it comes to farm equipment,” Cramer said, “there’s none better than the best-of-breed John Deere.”
Right now farmers are making more profits per acre, with variable margins per acre of corn up to 53% from 38% a year ago, and they are reinvesting those earnings into their business. That means there is incentive to plant that one extra acre of corn, and there is a good chance farmers will buy Deere’s equipment to get the job done. It’s probably little surprise then that the company, when it reported second-quarter earnings back on May 19, raised its 2010 outlook for North American agricultural sales.
So even with the stock trading less than a point off its 52-week high, Cramer thinks DE looks inexpensive given that profit potential. Plus, the price-to-earnings multiple sits a mere 13.3, while the long-term growth rate clocks in at 10%, which is another indication the stock is cheap. And keep in mind, too, that sales are expected to rise 11% to 13% in 2010, much more than Deere’s original guidance of 6% to 8%.
Cramer’s recommendation? Buy some now and then look to pick up some more the next time the market sells off because we now know that there’s a catalyst coming in the fall.
“And believe me,” the Mad Money host said, “you will hear about this Deere investment endlessly come September.”
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