Checking in on Agriculture and Construction with Deere Earnings

Heavy equipment manufacturer Deere & Company is scheduled to report earnings before market open on August 17. After a big rally in 2017, the stock has underperformed so far this year. Here’s what might be expected from its quarterly report.

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Deere (DE) is scheduled to report fiscal third-quarter earnings before the market opens on Friday, August 17. After a big run last year, the stock has taken a breather so far in 2018. 

For fiscal Q3, DE is expected to report adjusted EPS of $2.77, up from $1.97 in the prior-year quarter, on revenue of $9.21 billion, according to third-party consensus analyst estimates. Revenue is projected to grow 34.8% year over year, with a little over half of that growth a result of last year’s acquisition of road construction company Wirtgen. 

Two areas that management has indicated will weigh on profits again this quarter are higher material costs and transportation costs. The price of steel, a major component in DE’s products, as well as aluminum had already been climbing for some time amid robust economic growth, and recent tariffs have added to those costs. 

Last quarter, DE said it had higher transportation expenses since it had to rely on higher-priced premium expedited options, amid an ongoing truck driver shortage in the U.S. That shortage has resulted in higher prices and logistical challenges, both of which were commonly cited concerns among many companies in recent quarters. 

Management expects transportation expenses to be elevated again, but to a lesser extent than they were in the last report. To help offset the higher costs, DE said it will take steps to lower structural costs and increase prices.  

Agriculture and Turf

On last quarter’s earnings call, management was still pretty optimistic about the overall farming outlook. DE estimates U.S. farm cash receipts—which is a measure of the sale of agriculture commodities and payments from government agencies and crop/livestock insurance—will remain stable in 2018. Management also cited positive supply/demand trends in major crops like corn and soybeans. 

Some analysts have expressed concerns that Chinese tariffs on U.S. soybeans and pork could negatively impact farmers and eventually equipment purchases, but it’s hard to say how that’s going to trickle through and what kind of  impact that might have. 

In fiscal Q2, DE reported revenue in this division increased 22% year over year to $7.05 billion, representing a large portion of the company’s $9.747 billion in total equipment sales. For all of fiscal 2018, DE is projecting this division will grow roughly 14%. 

Construction and Forestry

This has been DE’s fastest growing division in recent quarters. Revenue in this segment was up 84% year over year to $2.7 billion last quarter. For all of fiscal 2018, DE is forecasting 83% year over year revenue growth from construction and forestry sales, with 56% of that growth attributed to Wirtgen, which specializes in manufacturing road construction equipment. 

Financial Services

This division provides financial services like equipment loans and leases and it has been a consistent generator of profit for the company in the past. Net income from this division was $104 million in fiscal Q2. DE forecasts it will generate $800 million in net income from this division for all of fiscal 2018.    

Some Perspective. DE has pulled back about $40 from its all-time high of $175.26 that it hit in February 2018, but even with that decline it’s outperforming the 24.83% increase in the S&P 500 (SPX, purple line) since the start of 2017. For a while, it was even outperforming the Nasdaq 100 (NDX, teal line), but that hasn’t been the case since June. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Deere Options Trading Activity

Around the upcoming earnings release, options traders have priced in a 4.5% stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility is on the higher end at the 71st percentile as of Thursday morning. 

Trading over the past few weeks has been heavier on the call side, although put volumes have picked up a little bit over the past few days—the put/call ratio during Wednesday’s session was 1.134. In short-term trading at the August 17 monthly expiration, activity has been heavier at the 140 strike call and the 133 strike put. 

The September 21 monthly expiration has been pretty busy as trading picked up over the past few weeks. Volume has been heavier on the call side and there is a good amount of call open interest starting at the 135 strike all the way up to the 160. Recent volume on the put side has been

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.

Good Trading,
JJ

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