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Deere (DE) Up 2% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Deere (DE). Shares have added about 2% in that time frame, outperforming the S&P 500.

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

Deere Q4 Earnings Miss, Stock Down on Weak FY19 View

Deerereported fourth-quarter fiscal 2018 (ended Oct 28, 2018) adjusted earnings of $2.30 per share, missing the Zacks Consensus Estimate of $2.44 by a margin of 6%.

Including tax adjustments related to the tax reform, the company reported earnings of $2.42 per share compared with the year-ago quarter's figure of $1.57 per share. Third-quarter performance benefited from favorable market conditions and positive customer response to the company's product lineup comprising advanced technology and product features. Further, cost management and pricing actions to counter cost pressures for raw materials and freight aided results.

Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) came in at $8.3 billion, surging 18% year over year. Revenues missed the Zacks Consensus Estimate of $8.59 billion.

The acquisition of the Wirtgen Group in December 2017 added 11% to net sales in the fiscal fourth quarter. Gain from price realization of 2% was offset by an unfavorable currency translation impact of 3%. Region wise, equipment net sales increased 21% in the United States and Canada, and 13% in the rest of the world. Total net sales (including financial services and others) came in at $9.4 billion, up 17% year over year.

Operational Update

Cost of sales in the quarter increased 18% year over year to $6.4 billion. Gross profit in the reported quarter came in at $1.96 billion, advancing 16% year over year. Selling, administrative and general expenses increased 6% year over year to $899 million. Equipment operations reported operating profit of $862 million in the quarter compared with $680 million in the prior-year quarter.

The Wirtgen acquisition contributed $79 million to the operating income in the quarter under review. Apart from the contribution from the Wirtgen acquisition, higher shipment volumes, price realization and lower warranty costs also drove results. However, these gains were partially offset by higher production costs, research and development expenses and unfavorable effects of foreign currency exchange. Total operating profit (including financial services) increased to $1.06 billion from $0.8 billion reported in the year-ago quarter.

Segment Performance

Agriculture & Turf segment's sales were up 3% year over year to $5.6 billion, primarily driven by higher shipment volumes and price realization offset by an unfavorable currency-translation impact. Operating profit at the segment declined 5% year over year to $567 million, owing to higher production costs, unfavorable effects of foreign-currency exchange and higher research and development costs, partially mitigated by higher shipment volumes and price realization.

Construction & Forestry sales increased 65% year over year to $2.74 billion from the prior-year quarter, aided by the Wirtgen acquisition, higher shipment volumes, price realization and lower warranty-related claims somewhat offset by unfavorable foreign exchange. This segment reported operating profit of $295 million, up a whopping 243% year over year. The Wirtgen acquisition contributed operating profit of $79 million for the quarter. The above-mentioned factors that led to sales growth were instrumental in driving the improvement in operating profit. However, higher production costs were a deterrent.

Net revenues at Deere's Financial Services division totaled $851 million in the reported quarter, up 9% year over year. The segment's operating profit came in at $201 million, an increase of 1% year over year.

Financial Update

Deere reported cash and cash equivalents of $3.9 billion at the end of the fiscal 2018 compared with $9.3 billion at the end of the prior fiscal. Cash flow from operations was $1.8 billion in fiscal 2018, compared with cash inflow of $2.2 billion in the prior fiscal. At the end of the fiscal, long-term borrowing totaled $27 billion, up from $26 billion at the end of prior fiscal.

Fiscal 2018 Performance

Deere reported adjusted earnings of $9.39 per share in fiscal 2018, falling short of the Zacks Consensus Estimate of $9.51. Including tax adjustments related to the tax reform, the company reported earnings of $7.24 per share in the fiscal, an improvement of 8% year over year.

Net sales of equipment operations improved 29% year over year to $33.3 billion but missed the Zacks Consensus Estimate of $33.4 billion. Total net sales (including financial services and others) came in at $37.4 billion, up 26% year over year.

Fiscal 2019 Outlook

Deere expects equipment sales to rise 7% in fiscal 2019 from fiscal 2018. The Wirtgen acquisition will contribute about 2% to net sales for the fiscal. The forecast factors an unfavorable impact of 2% for foreign-currency translation for fiscal.

For fiscal 2018, Deere anticipates net sales to increase about 7% year over year and projects net income of about $3.6 billion.

Growth in global agricultural and construction equipment markets will drive Deere. The company noted that agricultural equipment is being propelled by replacement demand despite tensions over global trade and other geopolitical issues.

Segment wise, Deere estimates Agriculture and Turf equipment sales to increase about 3% in fiscal 2019 and global sales for Construction & Forestry equipment to rise 15%. The outlook for adjusted net income from Financial Services has been set at $630 million for fiscal 2019.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

Currently, Deere has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Deere has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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