By Craig Bowles
Deere & Company (NYSE:DE) is slated to report 3Q 2014 earnings before the opening bell on Wednesday, August 13th. The earnings release is expected at approximately 7:00 a.m. EST with a 10:00 a.m. webcast available through John Deere Investor Relations. The company represents farm and construction machinery on the S&P 500 Index. Late in the business cycle, the size and cyclical nature of the company increases in importance to the overall market and as an economic indicator.
Outliers & Strategy
- Adjusted Earnings Per Share: The current Street estimate is $2.21 with a range of $1.97-$2.39. (Source: Yahoo! Finance). The estimate was $2.26 three months ago. Deere has beaten estimates the last four quarters by at least 17c and as much as 39c.
- Revenues: Analysts expect a decline of 5.5% y/y to $8.80 bln (range $8.19 bln to $9.58 bln).
- Equipment Sales: Company guidance is for down 4% YoY to $8.943 bln.
- Net Income Guidance (FY2014): Current net income guidance for FY2014 of $3.3 bln.
- Equipment Sales Guidance (FY2014): Current guidance is for down 4% YoY. Zack's removed coverage this qtr.
- Deere's P/E on trailing earnings is 9.3 compared to a five-year average of 15.7 and the industry's 13.5. The dividend yield is 2.5% compared to a five-year average of 2.0% and the industry's average of 2.2%, so relative value of the stock is a plus but the three business segments are very cyclical: agriculture/ turf, construction/forestry, & financial services. The outlook for golf courses and new home construction along with falling grain prices probably weigh on valuations.
- Insiders bought 79,098 shares over the past year but have sold 9,431 shares the last three months. Deere expanded their share buyback program by $8 Billion in December. Warren Buffett owns close to 4 mln shares.
- Analyst ratings for Deere are 3 Buy Ratings, 9 Hold, and 3 Sell Ratings, according to AnalystRatings.net.
- Corn prices, which tend to correlate somewhat with Deere. Looking at the Teucrium Corn Fund ETF (NYSEARCA:CORN), prices have weakened since 3Q 2012 and are hitting new lows. Deere's stock has been relatively flat during this period despite the headwind.
- Deere is compared other farm and construction machinery companies with quarterly results possibly impacting Caterpillar (NYSE:CAT), Ingersoll-Rand (NYSE:IR), and CNH Industrial (NYSE:CNHI). Other sympathy plays include Joy Global (NYSE:JOY), Monsanto (NYSE:MON), Titan International (NYSE:TWI), Stoneridge Inc. (NYSE:SRI).
- Deere shares have a 1-day average price change on earnings over the past eight quarters of 3.54%. Options are pricing in an implied move of 2.99% on earnings.
- 08/08: Fall grain crops see basis deterioration with elevators nearing 100% capacity, so the near-term outlook for grain prices remains unfavorable but low carry costs should provide some support, according to the weekly corn review on FarmFutures.com.
- 08/06: Russia is a small part of Deere sales, so the Ag products ban impact is limited, according to a post on Reuters.com.
- 08/06: Agco Corp reported a lower quarterly profit and slashed its full-year earnings outlook as falling farm commodity prices sent sales of its tractors, harvesters and other agricultural equipment sharply lower in almost every region of the world, according to a post on Reuters.com.
- 07/06: Deere management foresees significant earnings growth from China and India, according to a post on SeekingAlpha.com.
Deere's stock continues to find resistance above $90 since approaching $100 in 2011. Upside potential is increased after being flat for multiple years. Seasonality suggests some 4Q strength, so this is an important test below the 200-day moving average. Below $85 has a large support area just below $82.50. (Chart courtesy of StockCharts.com)
John Deere has beaten estimates the last four quarters by as little as 17c and as much as 39c. Given a lack of positive sentiment, even a 3c beat with revenue somewhat (at least $8.84 bln) closer to the $8.88 bln analyst midpoint would be a positive. Equipment sales better than down 4% YoY to $8.943 bln would be a positive. Previous Deere earnings that have beat estimates tend to see the stock trade higher before the conference call, and then management talks down prospects.
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