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Why Is Deere (DE) Up 13.5% Since the Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Deere & Company DE. Shares have added about 13.5% in that time frame, outperforming the market.

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

Deere Beats on Q2 Earnings & Revenues, Raises FY17 View

Deere’s second-quarter fiscal 2017 (ended Apr 30, 2017) earnings surged around 59.6% year over year to $2.49 per share. Earnings also beat the Zacks Consensus Estimate of $1.70 by a wide margin of 46.5%.

Operational Update

Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) came in at $7.260 billion, up 2% year over year. Revenues surpassed the Zacks Consensus Estimate of $7.244 billion.

Price realization had an impact of 2% in the quarter. Foreign-currency rates did not have a material translation effect on net sale. Region wise, equipment net sales decreased 5% in the U.S. and Canada, but increased 14% in the rest of the world. Total net sales (including financial services and others) were $8.287 billion, up 5% year over year.

Cost of sales in the quarter edged down 1.6% year over year to $5.445 billion. Gross profit in the quarter came in at $1.815 billion, up 15% year over year. Selling, administrative and general expenses increased 8.5% to $775 million. Operating profit significantly improved 50% year over year to $1.271 billion.

Operating income from equipment operations jumped 61% year over year to $1.111 billion, driven by price realization, the impact of a favorable sales mix, favorable impact of foreign-currency exchange and higher shipment volumes, partially offset by elevated warranty cost.

Segment Performance

Agriculture & Turf segment’s sales inched up 1% year over year to $5.794 billion, primarily due to price realization. Operating profit at the segment surged 63% year over year to $1.003 billion, stemmed by favorable sales mix, price realization and the favorable effects of foreign exchange.

Construction & Forestry sales increased 7% year over year to $1.466 billion, mainly as a result of higher shipment volumes and price realization, partially offset by higher warranty costs. The segment reported operating profit of $108 million compared with $74 million in the prior-year quarter. The increase was driven by shipment volumes and price realization, partially offset by higher warranty costs and a less-favorable sales mix.

Net revenue at Deere’s Financial Services division totaled $716 million in the reported quarter, up 10% year over year. The segment’s operating profit came in at $160 million, flat year over year. Net income at the segment was $114.4 million, as against $129.4 million recorded in the year-earlier quarter.

Financial Update

Deere reported cash and cash equivalents of $4.53 billion at the end of the fiscal second-quarter, as against $4.13 billion at the end of second quarter 2016. The company reported cash used in operations of $175 million for the six-month period ended Apr 30, 2017, compared with $312 million in the comparable period in last year. At quarter end, long-term borrowing totaled $23.2 billion, down from $24.6 billion recorded at the end of second quarter 2016.

Looking Ahead

Deere raised its equipment sales growth forecast to about 9% year over year for fiscal 2017 from the prior view of 4%. The company projects equipment sales to rise about 18% in third-quarter fiscal 2017 compared with the year-ago period. Foreign-currency rates are not expected to have a material translation impact on equipment sales for the fiscal year or the fiscal third quarter. For fiscal 2017, Deere also boosted its outlook for net sales to climb 9% year over year and net income at $2.0 billion.

Segment wise, Deere estimates Agriculture and Turf equipment sales to increase about 8% in fiscal 2017, with currency translation not expected to have a material impact. Industry sales for agricultural equipment in the U.S. and Canada are likely to be down 5% in fiscal 2017, owing to weakness in the livestock sector and the prolonged impact of low crop prices. This is also expected to affect both large and small equipment.

In the EU28 region, sales will be flat to down 5% due to low commodity prices and farm income. In South America, industry sales of tractors and combines are likely to jump about 20% on the back of improving economic and political conditions in Brazil and Argentina. Sales in Asia are projected to remain nearly flat, triggered by higher sales in India. Deere anticipates sales growth of turf and utility equipment in the U.S. and Canada to remain around flat for fiscal 2017.

The company foresees global sales for Construction & Forestry equipment to be up about 13%, with no material currency-translation impact. The outlook for net income from Financial Services has been set at $475 million for fiscal 2017. Lower losses on lease residual values will be partially offset by less-favorable financing spreads and an increased provision for credit losses.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been nine revisions higher for the current quarter compared to one lower. In the past month, the consensus estimate has shifted by 22.1% due to these changes.

Deere & Company Price and Consensus


Deere & Company Price and Consensus | Deere & Company Quote

VGM Scores

At this time, Deere's stock has a subpar score of 'D', on both growth and momentum front.  The stock was allocated also a grade of 'C' on the value side, putting it in the middle 20% 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.

Zacks' style scores indicate that the company's stock is suitable solely for value investors.


Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. It comes with little surprise that the stock has a Zacks Rank #1 (Strong Buy). We are expecting an above average return from the stock in the next few months.

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