It has been about a month since the last earnings report for Deere (DE). Shares have added about 3.4% 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 the most recent earnings report in order to get a better handle on the important catalysts.
Deere's Earnings and Revenues Trump Estimates in Q4
Deere reported fourth-quarter fiscal 2019 (ended Nov 3, 2019) adjusted earnings of $2.14 per share, beating the Zacks Consensus Estimate of $2.13. However, the reported figure declined 7% from the prior-year quarter’s adjusted earnings per share of $2.30.
The quarterly results reflect lingering uncertainties in the agricultural sector. Prevalent trade tensions, along with poor growing and harvesting conditions, have resulted in farmer’s getting cautious about their equipment purchases. Nevertheless, upbeat economic conditions are contributing to Deere's construction and forestry business’ solid performance.
Including one-time items, the company reported earnings per share of $2.27 in the fiscal fourth quarter compared with the $2.42 recorded in the year-ago quarter.
Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) came in at $8.70 billion, up 4% year over year. Revenues also surpassed the Zacks Consensus Estimate of $8.45 billion. Total net sales (including financial services and others) came in at around $9.90 billion, up 5% year over year.
Cost of sales in the reported quarter was up 5.5% year over year to $6.7 billion. Gross profit, excluding financial services, in the October-end quarter inched up 0.3% year over year, to $1.97 billion. Selling, administrative and general expenses flared up 5% year over year to $945 million. Equipment operations reported operating profit of $788 million in the quarter compared with the $862 million witnessed in the prior-year quarter. Total operating profit (including financial services) dipped to $916 million from the $1,063 million reported in the year-ago quarter.
The Agriculture & Turf segment’s sales were up 3% year over year to $5.7 billion, primarily due to price realization and higher shipment volumes, partly offset by the unfavorable currency-translation impact. Operating profit in the segment declined 7% year over year to $527 million, resulting from higher production costs, selling, administrative, and general expenses, unfavorable currency impact, and elevated research and development expenses.
Construction & Forestry sales improved 8% year over year to $2.95 billion from the prior-year quarter, aided by higher shipment and price realization, partly offset by the unfavorable currency-translation impact. This segment’s operating profit declined 12% year over year to $261 million.
Net revenues in Deere’s Financial Services division came in at $971 million in the reported quarter, up 14% year over year. The segment’s operating profit came in at $128 million, plunging 36% year over year.
Deere reported cash and cash equivalents of $3.86 billion at the end of fiscal 2019 compared with $3.9 billion recorded at the end of the prior fiscal year. Cash provided by operating activities were $3,412 million in fiscal 2019 compared with the prior fiscal year’s $1,822 million. At the end of the reported quarter, long-term borrowing was approximately $30.2 billion, up from the year-ago quarter’s $27.2 billion.
Fiscal 2020 Outlook
For fiscal 2020, Deere expects Agriculture and Turf equipment sales to be down 5-10%. Industry sales of agricultural equipment in the United States and Canada are anticipated to decline 5%, due to lower large equipment demand. Moreover, Construction and Forestry equipment sales are expected to decline 10-15%, due to sluggish construction activity and the company’s efforts to manage inventory levels. Nevertheless, the Financial Services segment is anticipated to benefit from lower losses on lease residual values and income earned on a higher average portfolio.
Net income for the fiscal year is now projected at $2.7-$3.1 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -24.4% due to these changes.
Currently, Deere has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
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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