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Deere (DE) Up 2.3% Since Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Deere & Company (DE - Free Report) . Shares have added about 2.3% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is DE due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Deere Q2 Earnings Lag, Sales Meet Estimates, View Up

Deere reported second-quarter fiscal 2018 (ended Apr 29, 2018) adjusted earnings of $3.14 per share, which increased 26% year over year. The bottom line missed the Zacks Consensus Estimate of $3.33.

Including tax adjustments related to the tax reform, the company reported earnings of $3.67 per share compared to $2.50 per share recorded in the year-ago quarter.

Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) came in at $9.75 billion, rising 34% year over year. Revenues came in line with the Zacks Consensus Estimate.

Deere’s acquisition of the Wirtgen Group in December 2017 added 12% to net sales in the fiscal second quarter. Sales also included a favorable currency-translation impact of 3% in the quarter. Region wise, equipment net sales increased 27% in the United States and Canada, and 45% in the rest of the world. Total net sales (including financial services and others) came in at $10.7 billion, up 29% year over year.

Operational Update

Cost of sales in the quarter increased 35% year over year to $7.3 billion. Gross profit in the reported quarter came in at $2.41 billion, advancing 32% year over year. Selling, administrative and general expenses flared up 20% to $939 million. Operating profit increased to $1.49 billion from $1.28 billion reported in the year-ago quarter.

Segment Performance

Agriculture & Turf segment’s sales were up 22% year over year to $7.05 billion, primarily driven by higher shipment volumes and positive currency-translation impact. Operating profit at the segment climbed 5% year over year to $1.06 billion, driven by higher shipment volumes, partially offset by higher research and development expenses and production costs.

Construction & Forestry sales surged 84% year over year to $2.70 billion, driven by higher shipment volumes and the favorable impact of currency translation. This segment reported operating profit of $259 million, up a whopping 133% year over year. The Wirtgen acquisition contributed operating profit of $41 million for the quarter. Excluding this buyout, the improvements primarily stemmed from higher shipment volumes and lower warranty expenses, partially offset by elevated production costs.

Net revenues at Deere’s Financial Services division totaled $795 million in the reported quarter, up 11% year over year. The segment’s operating profit came in at $179 million, up 13% year over year. Net income at the segment was $104 million, flat year over year.

Financial Update

Deere reported cash and cash equivalents of $4.20 billion at the end of the fiscal second quarter as against $4.53 billion at the end of the prior-year quarter. Cash used in operations was $1,222 million during the six-month period ended Apr 29, 2018, compared with cash inflow of $164 million in the comparable period last year. At the quarter end, long-term borrowing totaled $26.3 billion, up from $23.3 billion at the end of the year-ago quarter.

Looking Ahead

Deere raised its total equipment sales growth outlook for fiscal 2018 to around 30%, year over year, from the prior guidance of about 29%. The company expects its sales to be up 35% in third-quarter fiscal 2018 compared with the year-ago period. Deere stated that the Wirtgen acquisition will contribute about 12% to net sales for the fiscal and about 18% for the fiscal third quarter. The forecast also includes a positive foreign-currency translation impact of about 1% for the fiscal and for the fiscal third quarter. For fiscal 2018, Deere expects net sales to increase about 26% year over year and projects net income of about $2.3 billion.

Segment wise, Deere estimates Agriculture and Turf equipment sales to increase about 14% in fiscal 2018, including a positive currency-translation effect of about 1%. Industry sales for agricultural equipment in the United States and Canada are estimated to be up about 10% for the fiscal, aided by elevated demand for large equipment.

In the EU28 region, sales are projected to be up about 5% backed by improving conditions in the dairy and livestock sectors. In South America, industry sales of tractors and combines are estimated to be flat to up 5%, aided by strength in Brazil.

The company predicts global sales for Construction & Forestry equipment to be up a massive 83% for fiscal 2018, including a positive currency-translation effect of about 1%. The Wirtgen acquisition is likely to add about 56% to the sales for the segment. The outlook is based on global economic growth, including higher housing starts in the United States, and an improved oil and gas sector. In forestry, global industry sales are projected to be up about 10%.

The outlook for net income from Financial Services has been set at $800 million for fiscal 2018, which includes about $229 million of favorable changes associated with the recent tax reform. The outlook reflects a higher average portfolio and lower losses on lease residual values, partially offset by less-favorable financing spreads, and elevated selling, administrative and general expenses.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been eight revisions higher for the current quarter. Last month, the consensus estimate has shifted by 7.1% due to these changes.

Deere & Company Price and Consensus

 

VGM Scores

At this time, DE has an average Growth Score of C, however its Momentum is doing a lot better with an A. The stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is primarily suitable for momentum investors while also being suitable for those looking for value and to a lesser degree growth.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. Notably, DE has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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