Deere Earnings Preview: Wirtgen Acquisition Closed, What’s Next?

Deere & Co. (DE) reports Q1 fiscal 2018 earnings before market open on Friday, Feb. 16. Here’s a look at what might be expected from its quarterly results.

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Deere & Co. (DE) is scheduled to report first-quarter earnings for fiscal 2018 before market open on Friday, Feb. 16. DE ended 2017 close to record highs and shares were up 50.4%, compared to an 18.4% increase in the S&P 500 (SPX). 

For Q1 fiscal 2018, DE is expected to report adjusted earnings per share (EPS) of $1.16 on revenue of $6.4 billion, according to third-party consensus analyst estimates from the Earnings Analysis tab on the thinkorswim® platform. In the same quarter last year, adjusted EPS came in at $0.61 on revenue of $4.7 billion.

DE has always been known for its iconic turf and agriculture equipment, the company’s largest division, but it has also been focusing on expanding its presence in the construction industry. In December, it announced it had completed its $5.2 billion acquisition of the Wirtgen Group, a worldwide manufacturer of road equipment.

DE said its strategic rationale behind the acquisition was that it “allows market entrance into road construction equipment, providing greater exposure to the transportation sector and enhancing global presence for Deere construction segment.” This’ll be the first quarter that includes Wirtgen’s results, so management might provide some additional commentary now that the acquisition has closed.   

For all of fiscal 2018, DE issued guidance for a 22% year-over-year increase in net sales, with 12% of that expected growth resulting from the Wirtgen acquisition. Management forecasts 69% year-over-year growth in the construction and forestry segment, with 54% of that growth due to Wirtgen.

DE also plans to increase R&D spending by 18% in fiscal 2018, with half of that related to the recent acquisitions of Wirtgen and Blue River Technology, which closed in September 2017. Blue River makes smart agriculture equipment and DE management previously indicated they were interested in the company for its machine learning technology and plan to continue to invest in that area. 

Deere & Company Divisions

DEERE FINANCIAL SERVICES.

Deere’s financial services division, which provides financing and leasing services to customers, generated $477 million in net income in fiscal 2017. For fiscal 2018, management expects the division to generate $515 million in net income. TD Ameritrade clients can analyze potential drivers of a stock on the Fundamentals tab on the thinkorswim® platform. The Trefis price estimate vs. current market price is as of 2/15/18. Trefis information and estimates used in Company Profile are provided by Insight Guru, a separate and unaffiliated firm. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Deere Options Trading Activity

The options market has priced in an expected share price move of 4.4% in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility is at the 65th percentile as of this morning. This data was pulled at 9:30AM ET and could shift depending on trading activity leading up to the report.

Deere & Company Stock Chart

BIG SWINGS IN DEERE.

Deere (DE) hit an all-time high of $171.96 on Jan. 26 and then, along with global stocks, pulled back sharply and dropped to $148.60 on Feb. 9. Since then, the stock has rebounded back to $163.28 and it was up 3.34% year-to-date as of yesterday’s close. Implied volatility, shown on the bottom chart, spiked with the recent selloff, but it has been declined a bit from those levels leading up to the earnings release. Chart source: thinkorswim® from TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

In short-term trading at the Feb. 16 monthly expiration, trading has been heavier at the 165- and 167.5-strike calls while trading on the put side has been more concentrated at the 155, 157.5 and 160 strikes. 

At the Mar. 16 monthly expiration, the 180-strike call, a little ways out of the money, has seen heavier trading and had volume of 3,437 contracts during yesterday’s session. The next closest was the 170-strike call with volume of 252 contracts. On the put side, trading has been lighter and there’s been more activity at the 155 and 160 strikes.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Looking Ahead

After the recent market swings and heightened volatility, consider listening to earnings calls of major companies to get a sense of executive sentiment about consumer demand and company health. Management often provides commentary around macroeconomic factors and potential risks that could impact the company in upcoming quarters.

Earnings season is slowing down, but there’s still some large companies across sectors that have yet to release their quarterly results. Markets are closed on President’s Day, Feb. 19 and then MGM Resorts (MGM), Wal-Mart (WMT) and Home Depot (HD) are all slated to report before the open on Tuesday, Feb. 20.

Good Trading,
JJ
@TDAJJKinahan

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