North America

Earnings Preview: Deere & Co. Q3 2017 (DE)

By: Craig Bowles

Overview

Deere & Company (DE) is slated to report 3Q 2017 earnings before the opening bell on Friday, August 18th. 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 $1.91 (range $1.74 to $2.09). (Source: Yahoo! Finance) Consensus was $1.49 three months ago.
  • Revenues: Analysts expect an increase of 18.0% y/y to $6.92 bln (range $6.76 bln to $7.00 bln). Company guidance for FY17 is up 9% y/y.
  • Equipment Sales: Company guidance of up 18% y/y equates to $6.916 bln.
  • Net Income Guidance (FY2017): Company guidance is currently $2.00 bln (increased last qtr from $1.50 bln).
  • Equipment Sales Guidance (FY2017): Company guidance is up 9% y/y.
  • Price/Earnings of 23.8 compares to a 5-year average of 11.9; Price/Book of 5.5 compares to a 5-year average of 3.8; Price/Sales of 1.5 compares to a 5-year average of 0.9; and Price/Cash Flow of 10.8 compares to a 5-year average of 8.3. Dividend yield of 1.8% 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 10 Buy, 12 Hold, and 3 (down from 7 three qtrs. ago) Sell Ratings, according to MarketBeat.com.
  • Insiders sold 130,988 shares in the last three months and sold a net 388,155 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 6.64%. Options are pricing in an implied move of 5.76% on earnings.

 Recent News

  • 08/10: Crop report: USDA is forecasting the fall harvests will be larger-than-expected with corn production seen at 14.153 bln bushels (expected 13.807 bln) and soybeans at 4.381 bln (expected 4.203 bln). Wheat was cut to 1.739 bln but still higher than the 1.717 bln expected, according to a post on FarmFutures.com. (WASDE)
  • 08/07: Goldman Sachs upgraded Deere to Conviction Buy following their June upgrade to Buy. Sees farm machinery demand starting an inflection and expects the next quarter will begin a multi-year recovery. Believes agriculture machinery share of CapEx is in the early stages of normalizing, according to a post on Barron’s.com.
  • 07/24: John Deere is the 5th largest agricultural bank in the country. With farm income dropping steadily, Deere’s loans and leases practice can contribute to a vicious cycle, according to a post on ModernFarmer.com.
  • 06/27: Deere acquired Italy’s Mazzotti in an attempt to boost its already successful sprayer business, according to a post on Zack’s.com.
  • 06/02: JPMorgan upgraded Deere to Neutral from Underperform after the purchase of Wirtgen Group for $5.2 billion and estimates savings in strategic sourcing alone may be worth €180MM, according to a post on Reuters.com.

Technical Review

Deere’s stock has risen over 70% in the past year and followed Caterpillar’s lead the past couple of years. Both have rallied since the start of 2016. It seems a bit strange that Deere is making new all-time highs this year but these stocks didn’t do much from 2011 through 2015. Seasonality tends to be positive near year-end through the spring which is somewhat similar to grain prices, so that held true despite grain prices having disappointed. A 50% pullback of this sharp 2017 advance would suggest $109. (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. Crop prices showed unusually limited seasonal strength in the first half of the year. Insiders continue to sell into the rally. Warren Buffett dumped his shares earlier this year. Buybacks have dissipated since 2015. The economic setup hasn’t been very good since 2011 when lagging indicators like debt began outpacing economic growth. Two-year smoothed growth rates show cyclicals are slowing after having been the strongest sector of this expansion. If Caterpillar earnings is any indication, however, Deere would surprise on the upside. The company has beaten estimates by an average of 50c the last four quarters. Estimize consensus for an EPS of $1.96 on revenue of $6.881 bln compares to analyst consensus of $1.89 on revenue of $6.852 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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