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Will Struggling Deere Dig Deep to Offset Revenue Hit?

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August 20, 2015
Will Struggling Deere Dig Deep to Offset Revenue Hit?

Down on the farm things aren’t exactly sprouting and we’ll see how that plays out when Deere & Co. (DE)—the world’s largest maker of the tractors and other agriculture machinery that helps get food on our table—reports quarterly results on Friday.

A plunge in commodities prices, including corn and soybeans, is sapping industry spending on pricey equipment and investor enthusiasm for machinery makers of late, although DE shares are still up some 7% year-over-year, outpacing the S&P 500’s (SPX) 3.1% (see figure 1).

Managing Expectations

Large horsepower tractor sales, for example, are down 19% since January mostly because farmers aren’t so anxious to beef up their machinery when crop prices are so low. Considering ag and turf equipment make up some 78% of Deere’s revenue, that could impact results. 

Let’s not forget about the strong dollar. Like other multinationals, Deere will likely get hit by currency translations and by tough economic conditions abroad and even in markets like Canada where sinking tractor sales led to layoffs. Its biggest revenue-generating markets are the U.S. and Canada.

Still, many analysts are confident that Deere can handle the trouble, commenting that it has managed its way out of this type of situation before and its balance sheet is strong.

The company has also reported making strategic adjustments, adding financial services for instance, to help offset revenue loss to weaker spending on equipment.

Wall Street is looking for a per-share profit of $1.42 on topline sales of $7.21 billion. That’s down 39% and 17%, respectively, from last year’s results when Deere earned $2.33 a share on revenues of $8.72 billion. But Deere has a history of outpacing analysts’ seemingly conservative expectations.

Wall Street’s Collective Shrug?

Deere beat Street expectations with quarterly sales in all but two quarters since Q3 2013 and it beat the Street consensus for EPS in every quarter across the same stretch. But shares have closed higher following that news only three times.

Short-term options positioning tracked on TD Ameritrade’s thinkorswim® platform reveals traders are priced for a 3.5% move in either direction for DE shares around the earnings release.* Options volatility is in a relatively high 85th percentile for DE.

What’s most interesting is put open interest (the total outstanding contracts that have not been settled) tops call open interest 2:1.That's an unusual ratio for any stock, honestly. Puts contracts represent the right, but not the obligation, to sell the underlying shares at a set date and price; call contracts represent the right, but not the obligation, to buy the underlying shares at a set date and price.

*Probability analysis results are theoretical in nature, not guaranteed, and do not reflect any degree of certainty of an event occurring.

FIGURE 1: TOUGH TERRAIN?

Deere & Co. (DE) shares closed at their lowest in some three weeks on Wednesday as commodities prices continued their retreat. Technicians have noted chart red flags in the lead-up to earnings. Chart source: TD Ameritrade’s thinkorswim® platform. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

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