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Weak Ag Sector, Strong Dollar Could Hurt Deere’s Quarter

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November 24, 2015
What's ahead for John Deere's earnings?

Deere & Co. (DE) has that familiar tagline, “Nothing runs like a Deere.” But it’s the durability of its quarterly earnings that may be getting a run for its money.

The agricultural-machinery manufacturer is expected to turn in results in the pre-open on Wednesday. Wall Street analysts warn for a potential repeat of previous quarters’ lagging revenues and earnings—results, in fact, seen across Deere’s global industry. Still, a new quarter is a new quarter: Can Deere buck the trend?

If analysts polled by Thomson Reuters are correct, the answer is a resounding—no. On average, those analysts are looking for DE revenue to drop some 25% from the year-ago comparable to $6.15 billion. Per-share profit is expected to have plunged 59% to $0.75 a share when DE turns in its fiscal Q4 results pre-open on Wednesday, the Thomson Reuters survey shows.

DE’s individual results are due for release at a time when the farm-equipment industry has posted its weakest numbers since 2009, according to third-party analyst reports. Industry data confirms that DE manufactures and sells more tractors and harvesting combines than any other company in the world, meaning its results can be a harbinger of what’s ahead for its competitors and a measure of global economic conditions.

DE’s outlook for the 2016 fiscal year will likely be closely scrutinized. Traders may be looking for confirmation of what many Street analysts are calling a challenging period for nearly all segments of the ag industry amid bumper crops and weakening demand that pushed commodity prices down.

"We know that 2016 is not going to be an up year,” Robert W. Baird analyst Mircea Dobre told The Wall Street Journal. “The question is to what extent will the decline continue. There's a lot to be cautious about when it comes to agriculture, and Deere especially."

Help From Other Categories?

DE has other segments that could bolster top- and bottom-line results—the construction and forestry division, and financial services—but its ag and turf sector accounted for nearly 70% of its sales and 60% of its profits in the year-ago period, according to DE’s financial statements.

DE has other potential headwinds, too. Foreign currency translations, with the dollar at multi-year highs against other major currencies, could be a drag on overseas profits.

Deere stock chart

FIGURE 1: TOUGH GROUND?

Deere & Co. (DE) shares are off almost 15% for the year with much of that drop coming after its Q3 earnings report included a gloomy forecast for Q4. DE is up some 3.8% from its 52-week closing low of $71.85 hit on October 1. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

What Could Stock and Option Action Tell Us?

Short-term options traders are pricing in a potential 5.4% share price move in either direction around this earnings release, according to TD Ameritrade’s thinkorswim® platform’s Market Maker Move indicator. Implied volatility is on the high end, at the 72nd percentile.

On Monday, options were fairly active, including three times the usual trading activity in call options. Much of that was in the December timeframe, especially the Dec 80 call options. There was also a sizeable sell order placed for Dec 58 put options.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and 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.

DE stock has already reflected some degree of the downbeat climate. Since peaking in mid-July, Deere stock has retreated some 23% (figure 1). For the year, it’s off almost 15%, with much of that drop coming after it Q3 earnings report included a gloomy forecast for Q4. DE is up some 3.8% from its 52-week closing low of $71.85 hit on October 1. Does the share price leave it vulnerable to an upside surprise should Deere turn over an unexpected quarterly performance? Let’s find out.