Earnings Preview: Deere To Report Before the Open on Friday

Heavy equipment maker Deere & Co. reports second-quarter earnings before market open on Friday, May 18. Here’s a look at what might be expected from Friday’s report.

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Deere’s (DE) stock has dropped a ways from its all-time high of $175.26 it hit on February 16 when the company last reported earnings. Since the start of May, DE has rallied from its recent low of $131.26 heading into its fiscal second-quarter results, scheduled for before market open on Friday, May 18.  

For Q2, DE is expected to report adjusted EPS of $3.33 on revenue of $9.75 billion, according to third-party consensus estimates. That’s significantly higher than its Q1 results of $1.31 in adjusted EPS on revenue of $5.97 billion.

When DE last reported, management acknowledged they experienced some supply chain and logistics issues, one of the factors that contributed to the company missing Q1 revenue estimates. On last quarter’s earnings call, management indicated DE had made progress towards addressing these issues and they should diminish over the course of the year as suppliers and factories catch up.

Net sales in the Agriculture & Turf segment, the company’s largest division, increased 18% year over year to $4.2 billion in Q1 2018. After its last report, management upped its forecast from 9% year-over-year growth to 15% growth for all of fiscal 2018, citing stronger replacement demand for agriculture equipment, particularly in the U.S. and Canada. 

Management said it is also optimistic about growth in its Construction & Forestry segment, which seems to be getting a boost from DE’s December 2017 acquisition of the Wirtgen Group, a manufacturer of road construction equipment. In Q1 2018, net sales increased 57% year over year to $1.7 billion. Management is forecasting 80% year-over-year growth in fiscal 2018, with 56% coming from the Wirtgen acquisition.

Outside of DE’s equipment operations, the firm has said its financial services division is an important contributor to the company’s bottom-line (see chart below). In Q1 2018, the segment generated $425 million in net income, $278 million of that a result of favorable impacts from U.S. tax reform. 

Deere company profile shown on thinkorswim platform

DEERE FINANCIAL SERVICES.

In addition to DE’s equipment operations, its Financial Services division, which primarily provides financing for equipment, is an important profit driver for the company. In fiscal 2018, DE management forecasted the division will generate approximately $840 million in net income. As a result of tax reform, DE management upped their forecast for the division from $515 million. TD Ameritrade clients can analyze potential revenue drivers of a stock on the Fundamentals tab on the thinkorswim® platform. The Trefis price estimate vs. current market price is as of 5/17/18. 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

Around the upcoming earnings release, the options market has priced in about a 4.3% stock price move in either direction according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was at the 59th percentile as of this morning. 

Deere 2018 stock chart

DEERE 2018 STOCK CHART.

When DE last reported, the stock traded in a wide range from $162.01 to $175.26, a new all-time high. Since then, the stock dropped over the past several months, hitting a recent low of $131.26. The stock has rallied a bit from that level and closed at $147.34 in trading yesterday, although it hasn’t been able to break through the $150 mark. Chart source: thinkorswim® by TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

In short-term trading at the May 18 weekly expiration, calls have been active at the 147 and 150 strike prices. There’s also been a decent amount of activity at the 152.5 and 155 strikes, a little ways out of the money.

Further out at the June 15 monthly expiration, recent trading has been concentrated at the 155-strike call, which also has the highest open interest. Activity on the put side has been lighter and mostly at the 145 and 150 strikes in recent trading. 

Overall, options traders have been leaning towards the call side recently. During yesterday’s session, there were about three calls trading hands for every put.

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.

What’s Coming Up

Earnings season continues to slow down and a vast majority of the major companies have already reported. Two of the bigger companies scheduled next week are big-box retailer Target (TGT) and home improvement retailer Lowe’s (LOW), both reporting before market open on Wednesday, May 23. If you have time, check out today’s market update for a look at what else is going on.

Good Trading,
JJ
@TDAJJKinahan

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