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Why Is Deere (DE) Down 1.8% Since its Last Earnings Report?

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It has been about a month since the last earnings report for Deere & Company DE. Shares have lost about 1.8% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is DE due for a breakout? 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 drivers.

Deere Q1 Earnings Beat on Rising Demand, View Upbeat

Deere reported first-quarter fiscal 2018 (ended Jan 28, 2018) adjusted earnings of $1.31 per share, which surged a whopping 111% year over year. The bottom line surpassed the Zacks Consensus Estimate of $1.16. Deere’s strong results were driven by elevated demand, improvement in agricultural and construction equipment market partly offset by supply chain and logistical delays in shipping products.

Including tax adjustments related to the tax reform, the company reported a loss of $1.66 per share, compared to earnings of 62 cents per share recorded in the year-ago quarter.

Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) came in at $5.97 billion, rising 27% year over year. Revenues, however, missed the Zacks Consensus Estimate of $6.4 billion.

Deere’s acquisition of the Wirtgen Group in December 2017 added 5% to net sales in the first quarter. Sales also included a favorable currency-translation effect of 3% in the quarter. Region wise, equipment net sales increased 24% in the United States and Canada, and 33% in the rest of the world. Total net sales (including financial services and others) came in at $6.9 billion, up 23% year over year.

Operational Update

Cost of sales in the quarter increased 24% year over year to $4.7 billion. Gross profit in the reported quarter came in at $1.27 billion, advancing 38.5% year over year. Selling, administrative and general expenses flared up 5.6% to $705 million. Operating profit significantly improved to $636 million from $422 million reported in the year-ago quarter.

Segment Performance

Agriculture & Turf segment’s sales increased 18% year over year to $4.24 billion, primarily driven by higher shipment volumes and positive currency-translation impact. Operating profit at the segment climbed 78% year over year to $387 million, driven by higher shipment volumes and lower warranty costs, partially offset by escalated production costs.

Construction & Forestry sales surged 57% year over year to $1.73 billion, mainly as a result of the Wirtgen acquisition. Sales also increased due to higher shipment volumes and the favorable impact of currency translation. This segment reported operating profit of $32 million, down 14% from $37 million recorded in the prior-year quarter. The decline was due to operating loss for the Wirtgen acquisition related to the effects of purchase accounting and acquisition costs.

Net revenues at Deere’s Financial Services division totaled $776 million in the reported quarter, up 11% year over year. The segment’s operating profit came in at $217 million, up 30% year over year. Net income at the segment was $425.3 million compared with $114.4 million recorded in the year-earlier quarter. The increase was largely attributable to a provisional income-tax benefit of $278.1 million related to the tax reform.

Financial Update

Deere reported cash and cash equivalents of $3.92 billion at the end of the fiscal first quarter as against $3.89 billion at the end of the prior year quarter. Cash used in operations was $1,296.8 million in the quarter compared with $736.7 million in the prior-year quarter. At the quarter end, long-term borrowing totaled $26.4 billion, up from $22.9 billion at the end of the year-ago quarter.

Looking Ahead

Deere raised its total equipment sales growth outlook for fiscal 2018 to around 29% year over year from the prior guidance of about 22%. For the second-quarter of fiscal 2018, the company expects sales to be up 30-40% from the year-ago quarter. Deere stated that the Wirtgen acquisition will contribute about 12% to net sales for the fiscal and about 16% for the fiscal second quarter. The forecast also includes a positive foreign-currency translation impact of about 3% for the fiscal and about 4% in the fiscal second quarter. For fiscal 2018, Deere expects net sales to increase about 25% year over year and projects net income of about $2.1 billion. Excluding the impact of the tax reform, adjusted net income is forecast to be about $2.85 billion.

Segment wise, Deere estimates Agriculture and Turf equipment sales to increase about 15% in fiscal 2018, including a positive currency-translation effect of about 3%. Industry sales for agricultural equipment in the United States and Canada are estimated to be up about 10% for the fiscal, aided by higher demand for large equipment.

In the EU28 region, sales are projected to be up about 5% backed by improving conditions in the dairy and livestock sectors. In South America, industry sales of tractors and combines are estimated to be flat to up 5% aided by continued positive conditions, particularly in Argentina.

The company predicts global sales for Construction & Forestry equipment to be up a massive 80% for fiscal 2018, including a positive currency-translation effect of about 2%.  The Wirtgen acquisition is likely to add about 56% to the sales for the segment. The outlook is based on global economic growth, including higher housing starts in the United States, and an improved oil and gas sector. In forestry, global industry sales are projected to be up 5%.

The outlook for net income from Financial Services has been set at $840 million for fiscal 2018, which includes about $320 million of favorable changes associated with the recent tax reform. The outlook reflects a higher average portfolio, partially offset by elevated selling, administrative and general expenses.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been seven revisions higher for the current quarter. In the past month, the consensus estimate has shifted by 16.9% due to these changes.

Deere & Company Price and Consensus

 

Deere & Company Price and Consensus | Deere & Company Quote

VGM Scores

Currently, DE has a poor Growth Score of F, however its Momentum is doing a lot better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

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

The company's stock is suitable solely for momentum based on our styles scores.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise DE has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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