Deere (DE) Up 7.6% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Deere (DE). Shares have added about 7.6% 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 Q3 Earnings Miss, Revenues Surpass Estimates

Deere reported third-quarter fiscal 2018 (ended Jul 29, 2018) adjusted earnings of $2.59 per share, missing the Zacks Consensus Estimate of $2.77 by a margin of 6% due to higher raw material and freight costs. Deere’s shares lost around 4.5% in pre-market trading following the release.
 
Including tax adjustments related to the tax reform, the company posted earnings of $2.78 per share compared with the year-ago quarter’s figure of $1.97 per share. Third-quarter performance benefited from favorable market conditions and positive customer response to the company’s product lineup with advanced technology and product features. Further, cost management and pricing actions to counter cost pressures for raw materials and freight aided results.
 
Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) came in at $9.3 billion, surging 36% year over year. Revenues came ahead of the Zacks Consensus Estimate of $9.2 billion.
 
The acquisition of the Wirtgen Group in December 2017 added 17% to net sales in the fiscal third quarter. Sales were dented by an unfavorable currency-translation impact of 1%. Region wise, equipment net sales increased 29% in the United States and Canada, and 45% in the rest of the world. Total net sales (including financial services and others) came in at $10.3 billion, up 32% year over year.

Operational Update

Cost of sales in the quarter increased 36% year over year to $7.2 billion. Gross profit in the reported quarter came in at $3.2 billion, advancing 23% year over year. Selling, administrative and general expenses flared up 14% to $9139 million. Equipment operations reported operating profit of $1.087 billion for the quarter compared with $804 million in the prior-year quarter.
 
The Wirtgen acquisition contributed $88 million to the quarter under review. Excluding Wirtgen results, the improvement fin operating profit was driven by higher shipment volumes, lower warranty costs, and price realization, partially offset by higher production costs and research and development expenses. Total operating profit (including financial services) increased to $1.3 billion from $1.0 billion reported in the year-ago quarter.
 
Segment Performance
 
Agriculture & Turf segment’s sales were up 18% year over year to $6.3 billion, primarily driven by higher shipment volumes, price realization offset by an unfavorable currency-translation impact. Operating profit at the segment climbed 16% year over year to $806 million, driven by higher shipment volumes, lower warranty-related expenses and price realization, somewhat negated by higher production costs and research and development expenses.
 
Construction & Forestry
sales increased twofold to $3 billion from the prior-year quarter, aided by the Wirtgen acquisition. This segment reported operating profit of $281 million, up a whopping 153% year over year. The Wirtgen acquisition contributed operating profit of $88 million for the quarter. Excluding its impact, higher shipment volumes and lower warranty expenses, partially offset by higher production costs and sales-incentive expenses led to the overall improvement.
 
Net revenues at Deere’s Financial Services division totaled $830 million in the reported quarter, up 12% year over year. The segment’s operating profit came in at $196 million, a dip of 1% year over year. Net income at the segment was $151 million, up from $131 million in the prior-year quarter.
 
Financial Update

Deere reported cash and cash equivalents of $3.9 billion at the end of the fiscal third quarter compared with $6.5 billion at the end of the prior-year quarter. Cash used in operations was $675 million during the nine-month period ended Jul 29, 2018, compared with cash inflow of $729 million in the comparable period last year. At the end of the reported quarter, long-term borrowing totaled $26.8 billion, up from $23.7 billion at the end of the year-ago quarter.

Looking Ahead

Deere maintained its total equipment sales growth outlook for fiscal 2018 to around 30%, year over year. The company expects sales to be up 21% in fourth-quarter fiscal 2018 compared with the year-ago period. Deere stated that the Wirtgen acquisition will contribute about 12% to net sales for both the fiscal and fourth quarter. The forecast factors is an unfavorable impact of 3% for foreign-currency translation for the fiscal fourth quarter.

For fiscal 2018, Deere anticipates net sales to increase about 26% year over year and projects adjusted net income of about $3.1 billion, which excludes the provisional income-tax adjustments associated with tax reform.

Growth in global agricultural and construction equipment markets will drive Deere. The company noted that agricultural equipment is being buoyed by replacement demand despite tensions over global trade and other geopolitical issues.

Segment wise, Deere estimates Agriculture and Turf equipment sales to increase about 15% in fiscal 2018. Industry sales for agricultural equipment in the United States and Canada are estimated to be up about 10% for the fiscal, aided by elevated demand for large equipment.

In the EU28 region, sales are projected to be up about 5-10% backed by improving conditions in the dairy and livestock sectors as well as and positive arable-farming conditions in certain key markets. In South America, industry sales of tractors and combines are estimated to be flat to up 5%, aided by strength in Brazil. Sales in Asian is expected to remain flat from the year-ago levels. Industry sales of turf and utility equipment in the United States and Canada are expected to be flat to up 5% for the fiscal.

The company projects global sales for Construction & Forestry equipment to soar 81% for fiscal 2018. The Wirtgen acquisition is likely to add about 55% to the sales for the segment. The outlook is based on global economic growth, higher housing starts in the United States, and an improved oil and gas sector. In forestry, global industry sales are projected to be up about 10%.

The outlook for adjusted net income from Financial Services has been set at $583 million for fiscal 2018.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Deere has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated 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.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. 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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