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Dear, Oh Deere

By Stephen D. Simpson, Simpson, – Updated Nov 15, 2016 at 5:28PM

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Ethanol should boost farmers' incomes. Just not right away.

Who knows what'll actually happen over the next couple of years, but I for one would find it amusing if all the ethanol bulls had already moved on to the next new "can't miss" idea by the time a lot of this ethanol chatter comes true. And while the classic "buy the rumor, sell the news" has pushed up a lot of ethanol plays, an idea like Deere (NYSE:DE) might still have some legs.

I haven't been the biggest bull on Deere recently, mostly because I thought CNH (NYSE:CNH) was a cheaper way to play a lot of the same themes. And if you compare relative performance over the last six months, that hasn't been a bad play: Deere's done well, but it doesn't really come close to CNH's performance. Now, though, it might be time to reconsider this pair.

The bad news about Deere's recent quarter is that it wasn't very strong overall. The good news is that nobody thought it would be. Sales were up 2% (down 1% excluding currency) as good growth in the construction and commercial/consumer businesses were offset by a 7% decline in the agriculture business (which accounted for about half of all sales).

Likewise, there was good news/bad news on the operating side of the ledger. Equipment segment operating profits were down, as was overall income from continuing operations. But given the extent to which operating leverage can cut both ways, I thought Deere did pretty well in terms of maintaining margins. And given no immediate expectations of a dramatic turnaround in the agriculture business, the company is continuing with plans to more efficiently manage working capital by cutting inventories and receivables in that business.

Deere isn't quite my idea of a dirt-cheap dream stock, but it's not overpriced. And that makes it pretty rare when you look at the likes of Archer Daniels Midland (NYSE:ADM), Andersons (NASDAQ:ANDE), and other ethanol plays. What's more, I think it's better positioned than another ethanol play, AGCO (NYSE:AG), because that company is less exposed to the U.S. corn belt and has some dealer inventory corrections to withstand.

Ultimately ethanol will play out -- there are simply too many forces lined up in its favor, barring a drop in oil to $20 a barrel. It's just a case now of being patient enough to let reality catch up to hope and finding those stocks that haven't been overinflated on hype and hope.

For more agrarian Foolishness:

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

None

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Stocks Mentioned

Archer-Daniels-Midland Company Stock Quote
Archer-Daniels-Midland Company
ADM
$81.65 (-5.13%) $-4.42
Deere & Company Stock Quote
Deere & Company
DE
$334.22 (-3.44%) $-11.91
First Majestic Silver Stock Quote
First Majestic Silver
AG
$6.73 (-8.31%) $0.61
The Andersons, Inc. Stock Quote
The Andersons, Inc.
ANDE
$30.40 (-4.88%) $-1.56

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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