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Deere (DE) Up 3.8% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
Enbridge (ENB) closed the most recent trading day at $35.83, moving -1.27% from the previous trading session.

A month has gone by since the last earnings report for Deere (DE). Shares have added about 3.8% 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 catalysts.

Deere Q2 Earnings Lag Estimates, Trims FY19 Guidance

Deere & Company reported second-quarter fiscal 2019 (ended Apr 28, 2019) adjusted earnings of $3.52 per share, missing the Zacks Consensus Estimate of $3.58 by a margin of 2%. However, the reported figure recorded an improvement of 12% from the prior-year quarter’s adjusted earnings per share of $3.14.

Ongoing concerns over the impact of the escalating trade war between the United States and China on U.S. exports of key commodities, weakening agricultural market and delayed planting season in much of North America are resulted in farmer’s getting cautious about their equipment purchases. Deere has this trimmed fiscal 2019 guidance. The company’s shares fell 5% in pre-market trading.
 
Including one-time items, the company had reported earnings per share of $3.67 in the prior-year quarter. There were no adjustments in the currently reported quarter.

Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) came in at $10.27 billion, up 5% year over year. Revenues beat the Zacks Consensus Estimate of $10.15 billion. Total net sales (including financial services and others) came in at $11.34 billion, up 6% year over year.
 
Operational Update

Cost of sales in the reported quarter advanced 6% year over year to $7.8 billion. Gross profit in the reported quarter came in at $2.5 billion, reflecting year-over-year improvement of 4%.

Selling, administrative and general expenses inched up 1% year over year to $947 million. Equipment operations reported operating profit of $1,366 million in the quarter under review compared with $1,315 million in the prior-year quarter. Total operating profit (including financial services) increased to $1,536 million from $1,494 million reported in the year-ago quarter.
 
Segment Performance
 
Agriculture & Turf segment’s sales were up 3% year over year to $7.3 billion, primarily driven by higher shipment volumes and price realization offset by unfavorable currency-translation impact. Operating profit at the segment declined 4% year over year to $1,019 million, owing to higher production costs, and increased research and development expenses. These were partially mitigated by price realization and higher shipment volumes.
 
Construction & Forestry sales increased 11% year over year to $2.99 billion from the prior-year quarter, aided by the Wirtgen acquisition, higher shipment volumes and price realization, somewhat offset by unfavorable foreign exchange. This segment reported operating profit of $347 million, an improvement of 34% from the prior-year quarter figure of $259 million. The Wirtgen acquisition contributed operating profit of $102 million in the reported quarter. Apart from it, price realization and higher shipment volumes partially offset by higher production costs and less favorable product mix, drove profits.
 
Net revenues at Deere’s Financial Services division totaled $886 million in the reported quarter, up 11% year over year. The segment’s operating profit came in at $170 million, a decrease of 5% year over year.
 
Financial Update
 
Deere reported cash and cash equivalents of $3.5 billion at the end of the second quarter of fiscal 2019 compared with $4.2 billion at the end of the prior-year quarter. Cash utilized in operations was $1.5 billion in the second quarter of fiscal 2019, compared with $1.2 billion in the prior-year quarter. At the end of the reported quarter, long-term borrowing was approximately $28.3 billion, up from $26.3 billion at the end of prior-year quarter.
 
Fiscal 2019 Outlook
 
Deere trimmed fiscal 2019 guidance considering continued weakness in the agricultural sector.  Due to the company’s prudent management of field inventories, it anticipates production levels to be below retail sales in the second half of the year.

For fiscal 2019, Deere lowered expectation of equipment sales year-over-year growth to 5% from the prior expectation of 7%. The Wirtgen acquisition will contribute about 1% to net sales for the fiscal. The forecast also factors an unfavorable impact of 3% for foreign-currency translation for fiscal, higher than previous projection of an impact of 2%.
 
For the fiscal, the company now anticipates net sales to increase about 5% year over year, down from its previously guided growth expectation of 7%. The expectation for net income for the fiscal is now at about $3.3 billion compared with its earlier expected $3.6 billion.
 
For the Agriculture & Turf segment, Deere projects industry sales of agricultural equipment in the United States and Canada to be flat to up 5% in fiscal 2019. Industry sales in the EU28 member nations are forecast to be flat. South American industry sales of tractors and combines are expected to be flat to up 5% aided by strength in Brazil. Sales in Asia are likely to be flat to down slightly. Industry sales of turf and utility equipment in the United States and Canada are expected to be flat to up 5% for 2019.
 
The Construction & Forestry segment’s results will benefit from the addition of a full year of Wirtgen sales (adding 4% to its sales) compared with 10 months in fiscal 2018. The company anticipates generally positive fundamentals and economic growth worldwide. In forestry, global industry sales are expected to be flat to up 5% mainly on account of higher demand in EU28 countries and Russia.
 
For the Financial Services segment, results are expected to benefit from a higher average portfolio, partially offset by less-favorable financing spreads, higher provision for credit losses, and higher selling and administrative expenses.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -12.47% due to these changes.

VGM Scores

Currently, Deere has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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 #3 (Hold). We expect an in-line return from the stock in the next few months.



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