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Deere's Earnings Might Experience Another Dark Quarter in 3Q16

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Part 2
Deere's Earnings Might Experience Another Dark Quarter in 3Q16 PART 2 OF 8

Will Deere Be Able to Maintain Its Guidance in 3Q16?

Market expectations for Deere’s 3Q16 earnings

Based on Wall Street analysts’ consensus estimates, Deere & Company’s (DE) adjusted earnings per share are expected to fall 38.3% YoY (year-over-year) to $0.94 in 3Q16. Revenues in the third quarter are expected to fall 11.6% YoY to $6.04 billion. Deere has managed to beat earnings estimates every time in the last eight quarters by cutting down costs. The company’s record in trouncing revenue estimates has been less spectacular with just four beats in the last eight quarters. In comparison, Deere’s peers such as AGCO (AGCO) and Caterpillar (CAT) have managed to eclipse earnings estimates eight times and five times, respectively, in the last eight quarters.

Will Deere Be Able to Maintain Its Guidance in 3Q16?

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Deere’s fiscal 2016 guidance

In the 2Q16 earnings call, Deere downgraded its fiscal 2016 profit guidance for the second time in fiscal 2016—citing competitive pressures in its Construction (XHB) & Forestry Equipment segment and increased write-downs in the Financial Services (IYG) unit. The company reduced its fiscal 2016 forecast for net income by $100 million to $1.2 billion. Deere has maintained its forecast of cash flow from operations at $2.1 billion—a decline of 32% YoY.

The company also increased its fiscal 2016 sales forecast by one percentage point mainly due to expectations of a lower currency impact compared to previous estimates. The currency impact in the Agriculture (DBA) Equipment segment was reduced from 4% to 2%. Overall sales were forecast to fall 9% over 2015.

Market conditions

With the realization of the Brexit vote, Deere might be looking to reverse the figures for currency translations again. After a short rally in May and June, corn and soybean futures fell 24% and 17%, respectively, from their peak levels in June. A continuation of this trend will likely keep a tight lid on farm incomes this year. Weakening farm credit conditions likely won’t improve machinery purchases in the rest of the year. It will also depend on inventory levels and the production forecast that the company provides in its earnings call.

Among Deere’s peers, AGCO (AGCO) has raised its sales guidance this year. It expects increased demand from the North and South American regions.

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