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Deere Earnings: Stabilization for Struggling Ag Machinery?

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February 18, 2016
Deere reports earnings

Deere & Co. (DE) has managed to squeak out profits in recent quarters while steering its way through what has become one of the longest slumps in the farm-machinery business in 15 years, according to industry analysts. Will the world’s largest combined seller of tractors, harvesters, and construction equipment do it again in 2016? We’ll see what track DE is on when the company reports fiscal Q1 results in the pre-open Friday.

Know this about DE: In the last 12 quarters, when low crop prices had generally depressed equipment sales, DE topped Wall Street’s expectations. Will that streak continue? Traders appear to have some confidence that it can, driving the stock to its highest price level since August in recent trading sessions (figure 1).

Commodities Slump: Is Worst Over?

DE itself warned on its fiscal Q4 conference call for tough earnings comparables in coming quarters. But the company has also indicated it believes 2016 will be a trough for declines in agriculture and turf machinery sales—the segment that is its biggest contributor to revenue. Some industry analysts say they aren’t as confident that the world-wide downturn in the ag industry—driven by bumper crops and flagging demand that depressed commodity prices—is over.

Analysts polled by Thomson Reuters are forecasting a 38% drop in DE’s Q1 profit versus Q1 a year earlier, to $0.70 a share. They expect top line sales in Q1—usually the thinnest machinery sales quarter of the year—to backtrack by 11% to $5.0 billion. That revenue decrease matches DE’s own projections announced in November.

Let’s not forget, as the world’s biggest machinery-maker, DE’s bottom line can get slammed by fluctuating currencies; a strong dollar in its fiscal Q1 likely impacted overseas profits.

Deere’s Chief Economist J.B. Penn said in a speech this week that land values have held up, offsetting some of the sting of weak commodities prices, and underpinning the agricultural sector.

Industry analysts may want a bit more convincing; they’re anxious to hear how things in Q1 have shaped up and what that assessment might portend for the rest of the year.

Since DE is the green beast of farm-equipment makers, its results and commentary could also provide a snapshot on the commodities picture and in turn, global economic conditions. 

In Trading Action …

Heading into earnings, implied volatility tilts higher at the 74th percentile. Short-term option traders have priced in a potential 5% share price change in either direction around the earnings release, according to the TD Ameritrade thinkorswim® platform’s Market Maker Move indicator.

Volume is seen among buyers of the 82 put options and sellers of the 81 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.

Deere stock performance

FIGURE 1: DIGGING ITS WAY OUT?

DE’s stock generally follows the broader markets, and is on an upward trajectory this week. Since bottoming at a 52-week low in late January, DE stock has jumped some 14%. Will that momentum continue? Chart source: TD Ameritrade’s thinkorswim® platform. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.