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Earnings Preview: DE Closes Out Fiscal 2017 Tomorrow Morning

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November 21, 2017
Overhead view of farm tractor harvesting corn
istockphoto.com/jamesbrey

Ahead of the shortened holiday week, Deere & Co. (DE) reports fourth quarter fiscal 2017 earnings before the market opens on Wednesday, Nov. 22. Since its last report, shares have moved significantly higher and have been hovering around all-time highs heading into tomorrow’s release.

For the fourth quarter, DE is expected to report adjusted earnings per share (EPS) of $1.44, up from $0.90 in the prior-year quarter, on revenue of $6.91 billion, according to third-party consensus analyst estimates. That revenue estimate excludes revenue from the company’s financial services and other revenues.

When it last reported, DE announced better-than-expected results on the bottom line, but missed analyst’s revenue expectations, which was one of the factors that contributed to the stock’s post-earnings drop. Management cited improving farm and construction equipment markets as a contributor to that quarter’s positive results.

In the third quarter, DE reported revenue in its largest segment, agriculture and turf, increased 13% year-over-year to $5.34 billion and operating profit increased 20% to $685 million. Results in that segment have been supported by higher shipment volumes, price realizations and a more favorable sales mix, according to management. Increased production costs and higher warranty expenses were headwinds DE cited that impacted the segment’s results. For fiscal 2017, DE has said it expects about 9% year-over-year revenue growth in that segment, driven by strength in South American markets.

DE’s second largest division by revenue, construction and forestry, saw the largest growth on both the top and bottom line in the third quarter. Revenue came in at $1.5 billion, a 29% year-over-year increase, and operating profit increased 104% to $110 million. Management did note that results in the segment were negatively impacted by higher selling, general and administrative expenses, higher sales-incentive expenses, as well as higher warranty costs so far this year. For fiscal 2017, DE has said it expects about 15% year-over-year revenue growth, with strength in construction offsetting weakness in its forestry products.

Revenue in DE’s third primary segment, its financial services division, increased 11% year-over-year, to $741 million, in the third quarter and generated $200 million in operating profit. Overall, management said it thought that the agricultural credit situation was still relatively good and improving farm income in 2017 has helped drive farmer’s capital purchases.

On tomorrow’s call, one area analysts might be looking for additional information is the company’s previously announced acquisition of the Wirtgen Group, a worldwide manufacturer of road construction equipment headquartered in Germany. DE said it expects that acquisition to close sometime in the first quarter of fiscal 2018.

Deere Company Profile

FIGURE 1: DEERE COMPANY PROFILE.

Deere’s (DE) financial services division is its second largest from a profit perspective. TD Ameritrade clients can plug in their own forecasts and analyze a company’s divisions on the Fundamentals tab on the thinkorswim® platformTrefis 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 & Co. Trading Activity

After reporting earnings in August, DE gapped down from the previous day’s close of $123.98, hitting an intraday low of $112.87 before bouncing back to close at $117.31. Since then, shares have marched upwards and hit an all-time high of $137.82 during yesterday’s trading session. After closing at $136.92 yesterday, DE is up 31.59% year-to-date. 

Deere stock chart showing ytd performance compared to S&P 500 and Bloomberg Agriculture Commodity Spot Index

FIGURE 2: DEERE YTD PERFORMANCE.

So far this year, Deere (DE) is up 31.59% year-to-date, outpacing the S&P 500’s (SPX) 14.36% increase, which is charted as the teal line. The Bloomberg Agriculture Spot Index ($BCOMAGSP), which tracks the prices of a basket of agricultural commodities, is charted as the pink line and is down 2.59% year-to-date. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Around DE’s upcoming earnings release, options traders have priced in about a 4.3% potential share price move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term options trading at the November 24 expiration, calls have been active at the 136 and 137 strike prices, while puts have been active at the 130 and 135 strike prices. Looking further out at the December monthly expiration, trading has been heavier on the call side, with the highest open interest at the 120 and 140 strikes. As of this morning, the implied volatility is at the 85th percentile.

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.

Looking Ahead

Wednesday afternoon, the Fed is slated to release the minutes from its last meeting. While it is a backward view, it could provide some additional context to the Fed’s thinking as it approaches next month’s meeting. The probability of a rate hike at that meeting, based off of futures prices, is above 90% as of this morning.

Also, keep in mind it is a shortened week, with the U.S. market closed on Thursday and a 1 p.m. ET close on Friday in honor of the holiday. Holiday week markets are often thinly traded, potentially setting up for heightened volatility. Investors should consider using more caution than usual. If you have time, make sure to check out today’s market update to see what else is happening.

Good Trading,
JJ
@TDAJJKinahan

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