Why Is Deere (DE) Down 32.7% Since Last Earnings Report?

It has been about a month since the last earnings report for Deere (DE). Shares have lost about 32.7% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Deere's Earnings and Revenues Trump Estimates in Q1

Deere posted first-quarter fiscal 2020 (ended Feb 2, 2020) earnings of $1.63 per share, beating the Zacks Consensus Estimate of $1.28. The reported figure increased 5.8% from the prior-year quarter’s earnings per share of $1.54.

The quarterly results reflect signs of stabilization in the U.S. farm sector. Farmer sentiment improved on expectations of easing of trade tensions and higher agricultural exports.

Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) came in at $6.53 billion, down 6% year over year. Revenues, however, surpassed the Zacks Consensus Estimate of $6.20 billion. Total net sales (including financial services and others) came in at around $7.63 billion, down 4% year over year.

Operational Update

Cost of sales in the reported quarter was down 6.5% year over year to $5.1 billion. Gross profit, excluding financial services, for the January-end quarter fell 3.7% year over year, to $1.45 billion. Selling, administrative and general expenses flared up 5.9% year over year to $809 million. Equipment operations reported operating profit of $466 million in the quarter compared with the $577 million witnessed in the prior-year period. Total operating profit (including financial services) dipped to $645 million from $769 million reported in the year-ago quarter.

Segment Performance

The Agriculture & Turf segment’s sales slid 4% year over year to $4.5 billion, primarily due to lower shipment volumes and unfavorable currency-translation impact, partly offset by price realization. Operating profit in the segment increased 7% year over year to $373 million, resulting from higher price realization, improved production costs, and lower warranty-related expenses, partly offset by lower shipment volumes and voluntary employee-separation expenses.

Construction & Forestry sales slipped 10% year over year to $2 billion from the year-earlier quarter, due to lower shipment volumes and unfavorable foreign currency, partly offset by price realization. This segment’s operating profit plummeted 59% year over year to $93 million.

Net revenues in Deere’s Financial Services division came in at $931 million in the reported quarter, up 9% year on year. The segment’s operating profit came in at $179 million, down 7% year over year.

Financial Update

Deere reported cash and cash equivalents of $3.60 billion at the end of the fiscal first quarter compared with the $3.63 billion recorded at the end of the prior-year quarter. Cash utilized in operating activities were $508 million in the fiscal first quarter compared with the year-ago quarter’s $1,651 million. At the end of the reported quarter, long-term borrowing was $30.5 billion, up from $27.9 billion at the year-ago quarter’s end.

Outlook

Net income for the fiscal year is projected at $2.7-$3.1 billion.

For fiscal 2020, Deere expects Agriculture and Turf equipment sales to be down 5-10%. Industry sales of agricultural equipment in the United States and Canada are anticipated to be down 5%, due to softer large equipment demand in Canada. Moreover, Construction and Forestry equipment sales are expected to slip 10-15%, due to sluggish construction activity and the company’s efforts to manage inventory levels. Nevertheless, the Financial Services segment is anticipated to benefit from lower losses on lease residual values and income earned on a higher average portfolio.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -10.25% due to these changes.

VGM Scores

At this time, Deere has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. However, 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 D. 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.