Earnings: How Much Has The Farm Crisis Eaten Into DE Results?
Deere & Company (NYSE: DE) appears to have relied on what it calls “disciplined cost management” to plow through what has been widely considered the roughest period in the farming industry since the Depression.
When one of the world’s biggest makers of farm and construction equipment reports fiscal Q1 2017 results pre-market Friday, some analysts say they hope to see that the deep double-digit dips in revenues and profits, choked by low commodity prices and weak farm incomes, have slowed down. Agriculture and turf equipment account for nearly 80% of DE’s revenues.
The bigger question for some analysts is whether 2017 might represent the bottom of the farm industry drought. “There are signs that large ag market is nearing bottom as indicated by the fact that the decline expected in 2017 is less than we saw in 2016,” DE executives said on the Q4 conference call.
Some analysts are expecting that the Trump administration’s talk of rebuilding major infrastructure projects and an improving U.S. economy will be of benefit to DE and its construction-equipment competitors. But DE executives noted on the call that in spite of positive signs in the construction industry—housing starts are expected to exceed 1 million in 2017 according to the latest Commerce Department figures—the “market demand for construction equipment continues to be weak.” What’s keeping fleet replenishment on the sidelines? Construction contractors apparently still feel uncertain about what’s ahead, according to the call.
On balance, however, executives said, DE construction and forestry sales should inch up about 1% this year. Some analysts might want to know if that still looks to be true.
DE executives also noted on the Q4 call that they were expecting another declining year in livestock receipts, but thought then that better crop receipts might help total cash receipts to end 2017 about even to last year.
Also, some analysts might be looking for progress on DE’s plans, which the company announced in March 2016, to improve pre-tax profit by $500 million through structural cost reductions by the end of 2018.
The consensus revenue estimate from Wall Street analysts is $4.61 billion, about 3% below the $4.76 billion reported a year ago, according to the third-party estimates on the Earnings Analysis* tab on the thinkorswim platform from TD Ameritrade. On a per-share basis, profits are expected to come in at $0.51, well below last year’s Q1 earnings of $0.80 a share. DE has outpaced Wall Street’s expectations for 16 straight quarters.
The options market has priced in an expected share price move of about 4.2% in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim platform.
Call options trading has been heaviest at the weekly 110 strike while puts have been active at the 105 strike. The implied volatility is near the midpoint at the 45th percentile. (Please remember past performance is no guarantee of future results.)
Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.
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