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Why Is Deere (DE) Down 2.6% Since Last Earnings Report?

A month has gone by since the last earnings report for Deere (DE). Shares have lost about 2.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Deere due for a breakout? 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 Earnings Miss, Revenues Beat Estimates in Q1
 
Deere & Company reported first-quarter fiscal 2019 (ended Jan 28, 2019) adjusted earnings of $1.54 per share, missing the Zacks Consensus Estimate of $1.80 by a margin of 14%. However, the reported figure logged an improvement of 14% from the prior-year quarter’s earnings per share of $1.35. Notably, earnings improved despite the impact of material cost inflation. Further, concerns over tariffs and trade policies seem to be weighing on customer sentiment with farmers becoming cautious and subsequently delaying their equipment purchases.
 
Including one-time items, the company had incurred a loss of $1.66 in the prior-year quarter. There were no adjustments in the currently reported quarter.
 
Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) came in at $6.9 billion, surging 16% year over year. Revenues beat the Zacks Consensus Estimate of $6.8 billion. Total net sales (including financial services and others) came in at $7.98 billion, up 16% year over year.
 
Operational Update
 
Cost of sales in the reported quarter advanced 16% year over year to $5.4 billion. Gross profit in the reported quarter came in at $2.55 billion, surging 16% year over year. Selling, administrative and general expenses increased 8% year over year to $764 million. Equipment operations reported operating profit of $577 million in the quarter under review compared with $419 million in the prior-year quarter.
 
Apart from the contribution from the Wirtgen acquisition, higher shipment volumes, price realization drove results. However, these gains were partially offset by higher production costs, higher warranty-related expenses and unfavorable effects of foreign currency exchange. Total operating profit (including financial services) increased to $769 million from $636 million reported in the year-ago quarter.
 
Segment Performance
 
Agriculture & Turf segment’s sales were up 10% year over year to $4.7 billion, primarily driven by higher shipment volumes and price realization offset by unfavorable currency-translation impact and higher warranty-related expenses. Operating profit at the segment declined 10% year over year to $348 million, owing to higher production costs, improved warranty-related expenses, less favorable product mix, and higher research and development expenses. These were partially mitigated by price realization and higher shipment volumes.
 
Construction & Forestry sales increased 31% year over year to $2.26 billion from the prior-year quarter, aided by the Wirtgen acquisition, higher shipment volumes and price realization, somewhat offset by unfavorable foreign exchange. This segment reported operating profit of $229 million, a significant improvement from the prior-year quarter figure of $32 million. The Wirtgen acquisition contributed operating profit of $14 million in the reported quarter. Apart from it, price realization, partially offset by higher production costs and a less favorable product mix, led to the improvement in profit.
 
Net revenues at Deere’s Financial Services division totaled $855 million in the reported quarter, up 10% year over year. The segment’s operating profit came in at $192 million, a decrease of 12% year over year.
 
Financial Update
 
Deere reported cash and cash equivalents of $3.6 billion at the end of the first quarter of fiscal 2019 compared with $3.9 billion at the end of the prior-year quarter. Cash utilized in operations was $1.7 billion in the first quarter, compared with $1.3 billion in the prior-year quarter. At the end of the reported quarter, long-term borrowing was approximately $28 billion, up from $26 billion at the end of prior-year quarter.
 
Fiscal 2019 Outlook 
 
Deere maintained its expectation of equipment sales to rise 7% in fiscal 2019 from fiscal 2018. The Wirtgen acquisition will contribute about 1% to net sales for the fiscal. The forecast also factors an unfavorable impact of 2% for foreign-currency translation for fiscal. The company expects cost pressures to likely lessen through fiscal 2019.
 
For fiscal 2019, Deere anticipates net sales to increase about 7% year over year and projects net income of about $3.6 billion.
 
For the Agriculture & Turf segment, Deere projects industry sales of agricultural equipment in the United States and Canada to be flat to up 5% in fiscal 2019. This will be propelled by continued demand for both large and small equipment. Industry sales in the EU28 member nations are forecast to be flat as a result of drought conditions in key markets. South American industry sales of tractors and combines are projected to be flat to up 5% aided by strength in Brazil. Sales in Asia are likely to be flat to down slightly. Industry sales of turf and utility equipment in the United States and Canada are expected to be flat to up 5% for 2019.
 
The Construction & Forestry segment’s results will benefit from the addition of a full year of Wirtgen sales compared with 10 months in fiscal 2018. The two additional months will add about 4% to the division’s sales in the fiscal. The company anticipates generally positive fundamentals and economic growth worldwide. In forestry, global industry sales are expected to be up 5 to 10% mainly driven by higher demand in EU28 countries and Russia.
 
For the Financial Services segment, results are expected to benefit from a higher average portfolio, partially offset by less-favorable financing spreads, a higher provision for credit losses, and higher selling and administrative expenses.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Deere has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, 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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