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Should You Buy, Sell or Hold Deere (DE) Ahead of Q3 Earnings?
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Deere & Company (DE - Free Report) is anticipated to register year-over-year declines in both top and bottom lines when it reports third-quarter fiscal 2024 results on Aug 15, before the opening bell.
The Zacks Consensus Estimate for the quarter has moved down over the past 30 days to $5.80 per share. The consensus mark implies a 43% plunge from the year-ago actual. The Zacks Consensus Estimate for revenues is pegged at $11.02 billion, suggesting a 22.9% year-over-year decline.
Image Source: Zacks Investment Research
Solid Earnings Surprise History
Deere’s earnings outpaced the Zacks Consensus Estimates in the trailing four quarters, the average surprise being 16.04%. This is depicted in the following chart.
Image Source: Zacks Investment Research
What the Zacks Model Unveils
Our proven model does not conclusively predict an earnings beat for Deere this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that is not the case here.
Earnings ESP: Deere has an Earnings ESP of -1.19%. You can uncover the best stocks before they are reported with our Earnings ESP Filter.
Agricultural commodity prices have been on a downtrend throughout the May-July period due to the prospects of a supply surge in the backdrop of low demand. The combined impacts of low commodity prices, high interest rates and weather volatility have taken a toll on farmers’ equipment purchase decisions.
This trend was mirrored in Deere’s peer AGCO Corporation’s (AGCO - Free Report) fiscal second-quarter results, with revenues declining 15% year over year and adjusted earnings per share plunging 41%. Amid the weak demand backdrop, AGCO has resorted to production cuts and started a restructuring program to control expenses.
Likewise, Deere, in its last reported quarter’s earnings call, stated that it had been proactively adjusting production levels to lower inventory levels amid the weak demand.
Meanwhile, benefits from increasing U.S. infrastructure spending and improving single-family housing starts are expected to have aided the demand for Deere’s construction equipment in the quarter. However, declines in commercial real estate construction and softening rental demand are likely to have offset some of the gains.
Thus, we expect Deere’s top line to have declined year over year in the fiscal third quarter. The top-line results are anticipated to reflect decreases in production and sales volumes.
While raw material and freight costs are expected to have been favorable in the quarter, Deere’s efforts to downsize production are expected to have added to overhead costs. Research and development expenses are anticipated to have been higher due to the company’s continued focus on developing and incorporating technology solutions.
Nevertheless, favorable price realization and the company’s cost-reduction efforts are expected to have negated some of these headwinds on its margins in the fiscal third quarter.
Segmental Estimates
Our model predicts the Production & Precision Agriculture segment’s revenues to be $4.8 billion for the fiscal third quarter, suggesting a year-over-year decrease of 29.5%. The segment is likely to witness a 29.9% plunge in volumes, while prices are expected to have moved up 0.3%.
We expect the segment’s operating profit to be $853 million, indicating a 52% fall from the prior-year quarter’s reported figure.
Our estimate for the Small Agriculture & Turf segment’s revenues is pegged at $2.85 billion for the fiscal third quarter, indicating a 23.6% decline from the prior-year quarter’s actual. This mainly implies a 24.6% drop in the segment’s volumes, offset by favorable pricing of 0.7%.
The segment’s operating profit is estimated at $456 million, suggesting a 37.7% year-over-year fall.
The Construction & Forestry segment’s sales are estimated to be $3.23 billion for the fiscal third quarter, suggesting a 13.5% dip from the prior-year quarter’s reported number. Volumes are expected to decline 15.5% year over year, while pricing is likely to have a favorable impact of 1.6%.
We estimate the segment’s operating profit to slip 11.5% from the prior-year quarter’s reported figure to $634 million.
Our estimate for the Financial Services segment’s revenues is pegged at $1.37 billion for the fiscal third quarter, suggesting a 12% rise from the year-ago quarter’s actual. Our projection for the segment’s operating profit is pinned at $258 million, implying a 10% decline from the prior-year quarter’s reported number.
Price Performance & Valuation
Deere’s shares have plunged 13.8% in the year-to-date period compared with the industry’s 15.2% decline. The company has, however, lagged the broader Zacks Industrial Products sector’s 3.1% growth and the S&P 500’s climb of 12.2%.
DE’s YTD Price Performance Against Industry & Broader Market
Image Source: Zacks Investment Research
Deere shares are trading well below the 50-day moving average, indicating a bearish trend. It is also trading close to its 52-week low of $340.20.
DE Price Movement vs 50-Day Moving Average
Image Source: Zacks Investment Research
Deere is currently trading at a forward 12-month earnings multiple of 14.14X, higher than the industry’s 12.31X. Its peers, Kubota Corp (KUBTY - Free Report) and AGCO are trading below the industry average, at 10.67X and 10.63X, respectively.
Investment Thesis
Crop prices are anticipated to decline further due to high inventory levels and an increase in supply. Also, the U.S. Department of Agriculture projects a 25.5% year-over-year decline in net farm income this year. Thus, a pick-up in agricultural equipment demand is not expected in the near term. However, long-term prospects for DE’s agricultural equipment are positive, supported by rising global food demand and customers’ increasing preference for mechanization. Infrastructure spending will also drive demand for its construction equipment. Deere’s market share leadership position, investment in technology and strong dealer network provide a competitive edge, though its high debt levels are concerning.
Conclusion
Deere is expected to have seen lower revenues and earnings in third-quarter fiscal 2024, mainly dragged down by low volumes due to the ongoing weakness in the agricultural industry. If the company reports an earnings decline as expected, it would mark the third consecutive quarter of lower results.
No matter how the upcoming quarterly results play out, investors who already hold DE shares should continue to retain the stock in their portfolios to benefit from its solid long-term fundamentals. However, given its premium valuation, new investors can wait for a better entry point.
Image: Bigstock
Should You Buy, Sell or Hold Deere (DE) Ahead of Q3 Earnings?
Deere & Company (DE - Free Report) is anticipated to register year-over-year declines in both top and bottom lines when it reports third-quarter fiscal 2024 results on Aug 15, before the opening bell.
The Zacks Consensus Estimate for the quarter has moved down over the past 30 days to $5.80 per share. The consensus mark implies a 43% plunge from the year-ago actual. The Zacks Consensus Estimate for revenues is pegged at $11.02 billion, suggesting a 22.9% year-over-year decline.
Solid Earnings Surprise History
Deere’s earnings outpaced the Zacks Consensus Estimates in the trailing four quarters, the average surprise being 16.04%. This is depicted in the following chart.
What the Zacks Model Unveils
Our proven model does not conclusively predict an earnings beat for Deere this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that is not the case here.
Earnings ESP: Deere has an Earnings ESP of -1.19%. You can uncover the best stocks before they are reported with our Earnings ESP Filter.
Zacks Rank: The company currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Factors Likely to Shape Overall Q3 Results
Agricultural commodity prices have been on a downtrend throughout the May-July period due to the prospects of a supply surge in the backdrop of low demand. The combined impacts of low commodity prices, high interest rates and weather volatility have taken a toll on farmers’ equipment purchase decisions.
This trend was mirrored in Deere’s peer AGCO Corporation’s (AGCO - Free Report) fiscal second-quarter results, with revenues declining 15% year over year and adjusted earnings per share plunging 41%. Amid the weak demand backdrop, AGCO has resorted to production cuts and started a restructuring program to control expenses.
Likewise, Deere, in its last reported quarter’s earnings call, stated that it had been proactively adjusting production levels to lower inventory levels amid the weak demand.
Meanwhile, benefits from increasing U.S. infrastructure spending and improving single-family housing starts are expected to have aided the demand for Deere’s construction equipment in the quarter. However, declines in commercial real estate construction and softening rental demand are likely to have offset some of the gains.
Thus, we expect Deere’s top line to have declined year over year in the fiscal third quarter. The top-line results are anticipated to reflect decreases in production and sales volumes.
While raw material and freight costs are expected to have been favorable in the quarter, Deere’s efforts to downsize production are expected to have added to overhead costs. Research and development expenses are anticipated to have been higher due to the company’s continued focus on developing and incorporating technology solutions.
Nevertheless, favorable price realization and the company’s cost-reduction efforts are expected to have negated some of these headwinds on its margins in the fiscal third quarter.
Segmental Estimates
Our model predicts the Production & Precision Agriculture segment’s revenues to be $4.8 billion for the fiscal third quarter, suggesting a year-over-year decrease of 29.5%. The segment is likely to witness a 29.9% plunge in volumes, while prices are expected to have moved up 0.3%.
We expect the segment’s operating profit to be $853 million, indicating a 52% fall from the prior-year quarter’s reported figure.
Our estimate for the Small Agriculture & Turf segment’s revenues is pegged at $2.85 billion for the fiscal third quarter, indicating a 23.6% decline from the prior-year quarter’s actual. This mainly implies a 24.6% drop in the segment’s volumes, offset by favorable pricing of 0.7%.
The segment’s operating profit is estimated at $456 million, suggesting a 37.7% year-over-year fall.
The Construction & Forestry segment’s sales are estimated to be $3.23 billion for the fiscal third quarter, suggesting a 13.5% dip from the prior-year quarter’s reported number. Volumes are expected to decline 15.5% year over year, while pricing is likely to have a favorable impact of 1.6%.
We estimate the segment’s operating profit to slip 11.5% from the prior-year quarter’s reported figure to $634 million.
Our estimate for the Financial Services segment’s revenues is pegged at $1.37 billion for the fiscal third quarter, suggesting a 12% rise from the year-ago quarter’s actual. Our projection for the segment’s operating profit is pinned at $258 million, implying a 10% decline from the prior-year quarter’s reported number.
Price Performance & Valuation
Deere’s shares have plunged 13.8% in the year-to-date period compared with the industry’s 15.2% decline. The company has, however, lagged the broader Zacks Industrial Products sector’s 3.1% growth and the S&P 500’s climb of 12.2%.
DE’s YTD Price Performance Against Industry & Broader Market
Image Source: Zacks Investment Research
Deere shares are trading well below the 50-day moving average, indicating a bearish trend. It is also trading close to its 52-week low of $340.20.
DE Price Movement vs 50-Day Moving Average
Image Source: Zacks Investment Research
Deere is currently trading at a forward 12-month earnings multiple of 14.14X, higher than the industry’s 12.31X. Its peers, Kubota Corp (KUBTY - Free Report) and AGCO are trading below the industry average, at 10.67X and 10.63X, respectively.
Investment Thesis
Crop prices are anticipated to decline further due to high inventory levels and an increase in supply. Also, the U.S. Department of Agriculture projects a 25.5% year-over-year decline in net farm income this year. Thus, a pick-up in agricultural equipment demand is not expected in the near term. However, long-term prospects for DE’s agricultural equipment are positive, supported by rising global food demand and customers’ increasing preference for mechanization. Infrastructure spending will also drive demand for its construction equipment. Deere’s market share leadership position, investment in technology and strong dealer network provide a competitive edge, though its high debt levels are concerning.
Conclusion
Deere is expected to have seen lower revenues and earnings in third-quarter fiscal 2024, mainly dragged down by low volumes due to the ongoing weakness in the agricultural industry. If the company reports an earnings decline as expected, it would mark the third consecutive quarter of lower results.
No matter how the upcoming quarterly results play out, investors who already hold DE shares should continue to retain the stock in their portfolios to benefit from its solid long-term fundamentals. However, given its premium valuation, new investors can wait for a better entry point.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.