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Deere (DE) Up 16.2% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
·4 mins read

A month has gone by since the last earnings report for Deere (DE). Shares have added about 16.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Deere due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Deere's Earnings & Revenues Beat Estimates in Q3

Deere posted third-quarter fiscal 2020 earnings of $2.57 per share, beating the Zacks Consensus Estimate of $1.30. The reported figure, however, declined 8.5% from the prior-year quarter.

Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) came in at $7.86 billion, declining 12.4% year over year. Revenues, however, surpassed the Zacks Consensus Estimate of $6.64 billion. Total net sales (including financial services and others) came in at $8.92 billion, down 11% year over year.

Operational Update

Cost of sales in the reported quarter was down 15% year over year to $5.8 billion. Total gross profit for the reported quarter fell 2.4%, year over year, to $3.01 billion. Selling, administrative and general expenses dipped 16% to $752 million from the prior-year quarter. Equipment operations reported an operating profit of $1,147 million in the quarter compared with the $990 million witnessed in the prior-year quarter. Total operating profit (including financial services) increased 16% year over year to $1,390 million in the fiscal third quarter.

Segment Performance

The Agriculture & Turf segment’s sales was down 5% year over year to $5.67 billion, primarily due to lower shipment volumes and an unfavorable currency-translation impact, partly offset by price realization. Operating profit in the segment climbed 54% year over year to $942 million, resulting from price realization, and lower selling, administrative, and general expenses. However, this was offset by unfavorable impact of foreign-currency exchange, lower shipment volumes/sales mix as well as impairments and closure costs.

Construction & Forestry sales slid 28% to $2.19 billion from the year-earlier quarter on lower shipment volumes and unfavorable foreign-currency translation, partly negated by price realization. This segment’s operating profit plummeted 46% year over year to $205 million, mainly due to a lower shipment volumes/sales mix, partly offset by price realization and lower selling, administrative, and general expenses.

Net revenues in Deere’s Financial Services division came in at $892 million in the reported quarter, down 2% year on year. The segment’s operating profit came in at $243 million, up 19% year over year.

Financial Update

Deere reported cash and cash equivalents of $8.2 billion at the end of the fiscal third quarter 2020 compared with the $3.4 billion recorded at the end of the prior-year quarter. Cash generated from operating activities were $4,057 million in the nine-month period ended Aug 2, 2020 compared with the $404 million witnessed in the prior-year period. At the end of the reported quarter, long-term borrowing was $34 billion, up from the $29 billion witnessed at the year-ago quarter’s end.

Outlook

Net income for fiscal 2020 is projected at $2.25 billion. However, the company has stated that uncertainties regarding the impact of the COVID-19 pandemic might affect results.

Deere expects Agriculture and Turf equipment sales to be down 10% for fiscal 2020. The Construction and Forestry equipment segment’s sales are expected to be down 25% for the fiscal year. The outlook reflects market uncertainty due to the pandemic as well as efforts to bring down field inventory levels.

Additionally, the company has announced broad employee-separation programs that will be completed during the fiscal fourth quarter in support of its strategy to create a leaner, more agile organization. The program is expected generate annual savings of $175 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -17.17% due to these changes.

VGM Scores

Currently, Deere has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Deere has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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