By: Craig Bowles
Deere & Company (DE) is slated to report 4Q 2016 earnings before the opening bell on Wednesday, November 23rd. The earnings release is expected at approximately 7:00 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
- Earnings Per Share (EPS): The Street estimate is $0.40 (range $0.32 to $0.70). (Source: Yahoo! Finance). Consensus was $0.55 three months ago.
- Revenues: Analysts expect a decline of 9.4% y/y to $5.38 bln (range $5.24 bln to $5.47 bln).
- Equipment Sales: Company guidance of down 8% YoY equates to $5.457 bln.
- Net Income Guidance (FY2017): Company guidance is $1.350 bln for FY2016.
- Equipment Sales Guidance (FY2017): Company guidance is -10% YoY for FY2016.
- Price/Earnings of 18.2 compares to a 5-year average of 11.6; Price/Book of 3.9 compares to a 5-year average of 4.0; Price/Sales of 1.0 compares to a 5-year average of 1.0; and Price/Cash Flow of 7.5 compares to a 5-year average of 13.0. Dividend yield of 2.6% compares to a 5-year average of 2.4%. The three business segments are very cyclical: agriculture/ turf, construction/forestry, and financial services.
- Analyst ratings for Deere are 9 (5 two qtrs. ago) Buy, 8 Hold, and 7 Sell Ratings, according to MarketBeat.com.
- Insiders had no trades in the past six months but sold a net 50,941 shares in the past year. (source: NASDAQ.com) Buybacks totaled closer to $1.5 billion for 2012 and 2013 but the last two years are at approximately $3 billion. Warren Buffett still may own around 5.8% of the company’s shares but down from 7.2% in 2015.
- 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 suggests overly negative sentiment.
- 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 5.26%. Options are pricing in an implied move of 5.38% on earnings.
- 11/09: USDA crop report: Corn’s upside potential is even more limited on the heels of the USDA’s bearish Nov. 9 crop report, according to a post on FarmFutures.com.
- 10/31: Baird upgraded Deere to Outperform from Neutral citing signs of improved demand emerging outside US and meaningful cost savings in the pipeline. Also, a seasonal upward bias in corn prices post-harvest can become an additional catalyst, according to a post on Barron’s.com.
- 10/19: JPMorgan offers 10 reasons for keeping an Underweight rating on Deere, according to a post on Barron’s.com.
- 08/31: The Department of Justice will block Deere’s purchase of Monsanto’s (MON) Precision Planting equipment business, according to a post on Barron’s.com.
Deere’s high at the end of June 2015 at $98.23 was similar to the 2011 high when parts of the economy no longer responded to Fed actions. Seasonality tends to be positive late in the year through the spring which is somewhat similar to grain prices. Point and figure technicians have a bullish price target of $107. (Chart courtesy of StockCharts.com)
John Deere has had to deal with a global farm recession and weak construction-equipment markets. Cyclical stocks normally suffer as much or more than the general market when economic indexes invert as they have in 2016 and two-year smoothed growth rates show cyclicals slowing after having been the strongest sector of this expansion. The company has beaten estimates by an average of 28c the last four quarters. Estimize consensus for an EPS of $0.45 on revenue of $5.406 bln compares to analyst consensus of $0.40 on revenue of $5.38 bln. Our first look at 2017 guidance will be 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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