North America

Earnings Preview: Deere & Co. Q2 2017 (DE)

By: Craig Bowles

Overview

Deere & Company (DE) is slated to report 2Q 2017 earnings before the opening bell on Friday, May 19th. The earnings release is expected at approximately 6:45 a.m. ET with a 10:00 a.m. webcast available through John Deere Investor Relations. The company represents farm and construction machinery on the S&P 500 Index and results can affect futures trading. Late in the business cycle, the size and cyclical nature of the company increases in importance to the overall market and as an economic indicator.

Outliers & Strategy

Key measures:

  • Earnings Per Share (EPS): The Street estimate is $1.65 (range $1.27 to $2.02). (Source: Yahoo! Finance). Consensus was $1.51 three months ago.
  • Revenues: Analysts expect an increase of 3.2% y/y to $7.33 bln (range $7.12 bln to $7.95 bln). Company guidance for the FY is up 4% YoY. Revenue was 10.8% above equipment sales in the year ago qtr (which is probably where the high end of analyst estimates are at) and nearly 20% above last qtr, so consensus at only 2% above equipment sales guidance suggests analysts are underestimating revenue if company guidance is any indication.
  • Equipment Sales: Company guidance of up 1% YoY equates to $7.178 bln.
  • Net Income Guidance (FY2017): Company guidance is $1.500 bln.
  • Equipment Sales Guidance (FY2017): Company guidance is up 4% YoY.
  • Price/Earnings of 24.6 compares to a 5-year average of 11.9; Price/Book of 5.3 compares to a 5-year average of 3.8; Price/Sales of 1.3 compares to a 5-year average of 0.9; and Price/Cash Flow of 9.5 compares to a 5-year average of 8.3. Dividend yield of 2.1% compares to a 5-year average of 2.5%. The three business segments are very cyclical: agriculture/ turf, construction/forestry, and financial services.
  • Analyst ratings for Deere are 11 (5 one year ago) Buy, 10 Hold, and 4 (7 two qtrs. ago) Sell Ratings, according to MarketBeat.com.
  • Insiders sold 32,057 shares in the last three months and sold a net 259,817 shares in the past year. (source: NASDAQ.com) Buybacks got close to $3 billion for 2014 and 2015 before backing off to $200 million in 2016. Warren Buffett had owned 7.2% of the company’s shares in 2015 and sold a little in 2016 before selling all his shares earlier this year.
  • Corn prices tend to correlate somewhat with Deere. Corn shows a 2014 low and remains above that. Teucrium Corn Fund ETF (CORN) having made new lows in 2016 and remains down.
  • Deere is compared to other farm and construction machinery companies with quarterly results possibly impacting Caterpillar (CAT), Ingersoll-Rand (IR), and CNH Industrial (CNHI). Other sympathy plays include Joy Global (JOY), Monsanto (MON), Titan International (TWI), and Stoneridge Inc. (SRI).
  • Deere shares have a 1-day average price change on earnings of 6.56%. Options are pricing in an implied move of 4.27% on earnings.

 Recent News

  • 05/10: Crop report: USDA’s domestic and world crop numbers in the recent monthly report remained supportive. U.S. corn ending stocks for 2017/2018 came in at 2.11 billion, down from this year’s 2.295 billion. World corn carryout for 2017/2018 came in at 195.27 million metric tons, down from this year’s 223.90 million. (Usage is expected to fall 2% but not the 10% these crop numbers are declining.), according to a post on FarmFutures.com.
  • 05/01: Corn planting increased to 34% as of Sunday to match the five-year average. Corn emergence reached 9% versus 12% a year ago and the 8% average, according to a post on FarmFutures.com.
  • 05/01: Deere & Co says was informed by Monsanto that it has chosen to terminate a 2015 agreement for Deere to acquire Precision Planting LLC business, according to a post on Reuters.com.
  • 04/11: Stifel initiated coverage on Deere with a Buy rating while suggesting that lower costs and strengthening customers set the stage for a strong 2018, according to a post on Barron’s.com.
  • 03/21: JPMorgan compares risks with Caterpillar needing to “better manage its forecasting and inventory turns,” while Deere’s “Finco bears significant residual value risk if the US agriculture down-cycle is extended,” according to a post on Barron’s.com.

Technical Review

Deere’s stock has followed Caterpillar’s lead the past couple of years. Both have rallied since 2015. It seems a bit strange that Deere is making new all-time highs this year but these stocks haven’t done much since 2011. Seasonality tends to be positive late in the year through the spring which is somewhat similar to grain prices, so that held true despite grain prices having disappointed. (Chart courtesy of StockCharts.com)

Summary

John Deere has had to deal with a global farm recession and weak construction-equipment markets but the stock has pushed to all-time highs with better than expected earnings reports and corn prices not falling further. If oil prices are any indication for the grains and ethanol production, any hopes for a delayed seasonal rally in crop prices are fading except for maybe beans. Insiders selling lightened up the past three months after increasing the prior quarter when Warren Buffett dumped his shares. Buybacks have dissipated since 2015. The economic setup is still terrible with debt and inflation growth outpacing other areas of the economy. Two-year smoothed growth rates show cyclicals are slowing after having been the strongest sector of this expansion. Despite so many negatives, revenue would seem to have potential to surprise on the upside this quarter. The company has beaten estimates by an average of 31c the last four quarters with the year-ago quarter having an 8c beat. Estimize consensus for an EPS of $1.67 on revenue of $7.248 bln compares to analyst consensus of $1.65 on revenue of $7.33 bln. Guidance is always of interest. Previous Deere earnings that have beaten estimates tend to see the stock trade higher before the conference call, and then management talks down prospects.

 

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