North America

Earnings Preview: John Deere Q1 2017 (DE)

By: Craig Bowles

Overview

Deere & Company (DE) is slated to report 1Q 2017 earnings before the opening bell on Friday, February 17th. 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.

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Outliers & Strategy

Key measures:

  • Earnings Per Share (EPS): The Street estimate is $0.52 (range $0.35 to $0.85). (Source: Yahoo! Finance). Consensus was $0.56 three months ago.
  • Revenues: Analysts expect a decline of 2.0% y/y to $4.67 bln (range $4.51 bln to $5.37 bln).
  • Equipment Sales: Company guidance of down 4% YoY equates to $4.578 bln.
  • Net Income Guidance (FY2017): Company guidance is $1.400 bln.
  • Equipment Sales Guidance (FY2017): Company guidance is -1% YoY.
  • Price/Earnings of 22.6 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 9.1 compares to a 5-year average of 8.3. Dividend yield of 2.2% 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 (5 three qtrs. ago) Buy, 12 Hold, and 5 (7 last qtr) Sell Ratings, according to MarketBeat.com.
  • Insiders sold 140,110 shares in the last three months and sold a net 212,970 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 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 6.53%. Options are pricing in an implied move of 4.77% on earnings.

Recent News

  • 01/24: JPMorgan reiterated an Underweight rating on Deere citing valuation and that North American retail sales of high HP tractors and combines have already fallen 48% and 58% from peak (2013), respectively; but demand only dipped below trend in 2015 after ~7 years above trend, according to a post on Barron’s.com.
  • 01/13: Credit Suisse issued a bullish note on Deere citing that cost-cutting is on track to deliver at least $500M in savings, according to a post on Barron’s.com.
  • 01/12: The corn crop was a little smaller than trade forecasts. USDA’s reduction trimmed ending stocks to 2.36 billion from December’s 2.4 billion. (Corn has quietly moved to new six-month highs some 60 cents above September lows.), according to a post on FarmFutures.com.
  • 12/30: Barclays thinks Deere is fairly priced. Ag machinery sales in North America hit an all-time high in 2013, with 2014 not far behind. Deere now trades at 9-10x that peak number another 3-4 years to run in the down-cycle, according to a post on Barron’s.com.

Technical Review

Deere’s stock has followed Caterpillar’s lead the past couple of years, so CAT’s having flattened out since November while Deere has pushed to new all-time highs is a bit of a worry. Seasonality tends to be positive late in the year through the spring which is somewhat similar to grain prices. Point and figure technicians have met their bullish price target of $109. (Chart courtesy of StockCharts.com)

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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 on strength since August with better than expected earnings reports and corn prices trending higher. Insiders ramped up their selling the past three months. The economic setup is still terrible with debt and inflation growth outpacing other areas of the economy. 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 32c the last four quarters with the year-ago quarter having a 10c beat. Estimize consensus for an EPS of $0.56 on revenue of $4.667 bln compares to analyst consensus of $0.52 on revenue of $4.67 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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