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Deere (DE) Beats on Q2 Earnings & Revenues, Raises FY17 View

Zacks

Deere & Company’s DE second-quarter fiscal 2017 (ended Apr 30, 2017) earnings surged around 59.6% year over year to $2.49 per share. Earnings also beat the Zacks Consensus Estimate of $1.70 by a wide margin of 46.5%.

Operational Update

Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) came in at $7.260 billion, up 2% year over year. Revenues surpassed the Zacks Consensus Estimate of $7.244 billion.

Price realization had an impact of 2% in the quarter. Foreign-currency rates did not have a material translation effect on net sale. Region wise, equipment net sales decreased 5% in the U.S. and Canada, but increased 14% in the rest of the world. Total net sales (including financial services and others) were $8.287 billion, up 5% year over year.

Deere & Company Price, Consensus and EPS Surprise


Deere & Company Price, Consensus and EPS Surprise | Deere & Company Quote

Cost of sales in the quarter edged down 1.6% year over year to $5.445 billion. Gross profit in the quarter came in at $1.815 billion, up 15% year over year. Selling, administrative and general expenses increased 8.5% to $775 million. Operating profit significantly improved 50% year over year to $1.271 billion.

Operating income from equipment operations jumped 61% year over year to $1.111 billion, driven by price realization, the impact of a favorable sales mix, favorable impact of foreign-currency exchange and higher shipment volumes, partially offset by elevated warranty cost.

Segment Performance

Agriculture & Turf segment’s sales inched up 1% year over year to $5.794 billion, primarily due to price realization. Operating profit at the segment surged 63% year over year to $1.003 billion, stemmed by favorable sales mix, price realization and the favorable effects of foreign exchange.

Construction & Forestry sales increased 7% year over year to $1.466 billion, mainly as a result of higher shipment volumes and price realization, partially offset by higher warranty costs. The segment reported operating profit of $108 million compared with $74 million in the prior-year quarter. The increase was driven by shipment volumes and price realization, partially offset by higher warranty costs and a less-favorable sales mix.

Net revenue at Deere’s Financial Services division totaled $716 million in the reported quarter, up 10% year over year. The segment’s operating profit came in at $160 million, flat year over year. Net income at the segment was $114.4 million, as against $129.4 million recorded in the year-earlier quarter.

Financial Update

Deere reported cash and cash equivalents of $4.53 billion at the end of the fiscal second-quarter, as against $4.13 billion at the end of second quarter 2016. The company reported cash used in operations of $175 million for the six-month period ended Apr 30, 2017, compared with $312 million in the comparable period in last year. At quarter end, long-term borrowing totaled $23.2 billion, down from $24.6 billion recorded at the end of second quarter 2016.

Looking Ahead

Deere raised its equipment sales growth forecast to about 9% year over year for fiscal 2017 from the prior view of 4%. The company projects equipment sales to rise about 18% in third-quarter fiscal 2017 compared with the year-ago period. Foreign-currency rates are not expected to have a material translation impact on equipment sales for the fiscal year or the fiscal third quarter. For fiscal 2017, Deere also boosted its outlook for net sales to climb 9% year over year and net income at $2.0 billion.

Segment-wise, Deere estimates Agriculture and Turf equipment sales to increase about 8% in fiscal 2017, with currency translation not expected to have a material impact. Industry sales for agricultural equipment in the U.S. and Canada are likely to be down 5% in fiscal 2017 owing to weakness in the livestock sector and the lingering impact of low crop prices. This is also expected to affect both large and small equipment.

In the EU28 region, sales will be flat to down 5% due to low commodity prices and farm income. In South America, industry sales of tractors and combines are likely to jump about 20% on the back of improving economic and political conditions in Brazil and Argentina. Sales in Asia are projected to remain nearly flat, triggered by higher sales in India. Deere anticipates sales growth of turf and utility equipment in the U.S. and Canada to remain around flat for 2017.

The company foresees global sales for Construction & Forestry equipment to be up about 13%, with no material currency-translation impact. The outlook for net income from Financial Services has been set at $475 million for fiscal 2017. Lower losses on lease residual values will be partially offset by less-favorable financing spreads and an increased provision for credit losses.

Share Price Performance

In the last one year, Deere has underperformed the Zacks classified Machinery-Farm sub-industry with respect to price performance. The stock gained 36.9%, while the industry recorded growth of 33.6% over the same time frame.



Zacks Rank

Currently, Deere carries a Zacks Rank #2 (Buy).

Other top-ranked stocks in the same space include AGCO Corp. AGCO, Altra Industrial Motion Corp. AIMC and Applied Industrial Technologies, Inc. AIT. All three of these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AGCO has a remarkable positive average earnings surprise of 40.39% for the last four quarters. Altra Industrial Motion generated a positive average earnings surprise of 15.93% over the trailing four quarters. Applied Industrial Technologies has delivered an average positive earnings surprise of 9.78% in the past four quarters.

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