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Deere: Strong Adjusted Earnings Are Expected in Q2

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Updated

Deere’s adjusted EPS expectations

Deere (DE) is expected to post an adjusted EPS (earnings per share) of $3.31 for the second fiscal quarter—an increase of 32.9% on a YoY (year-over-year) basis. In the second fiscal quarter of 2017, Deere reported an EPS of $2.49. Deere managed to beat analysts’ estimates in the first fiscal quarter. Deere could continue the trend in the second fiscal quarter.

If Deere can deliver, the projected adjusted EPS would be the highest for the second quarter. The adjusted EPS growth would come from increased revenue supported by the Wirtgen Group and improved operating costs as a percentage of revenues. Deere’s cost of goods sold is expected to be ~$7.2 billion, which is 73.1% of the projected equipment operations revenue. For the same quarter last year, Deere’s cost of goods sold was 75% of the equipment operations revenue—a gain of 190 basis points from the previous year. Similarly, Deere’s SG&A (selling, general, and administrative) expenses could be at $958 million in the second quarter, which represents 9.8% of the projected equipment operations revenue. In fiscal second quarter 2017, the SG&A expenses represented 10.7% of the equipment revenue, which implies a gain of 90 basis points year-over-year.

Outstanding shares

At the end of the first fiscal quarter, Deere still had $3.26 billion left under its share repurchase program. Currently, Deere doesn’t seem to be keen on buying back shares. In the previous quarter, Deere didn’t buy back any shares. The trend is expected to continue in the second fiscal quarter. However, the stock option issues could increase the outstanding shares. Deere’s outstanding shares in the second fiscal quarter could be ~325.6 million—compared to 322.5 million in the second fiscal quarter of 2017. The higher outstanding shares could have a negative impact on the adjusted EPS, but the effect would be small.

Investors can hold Deere indirectly by investing in the First Trust Indxx Global Agriculture ETF (FTAG), which has 4.2% of its portfolio in Deere. FTAG’s other holdings include DowDuPont (DWDP), Monsanto (MON), and FMC (FMC) with weights of 9.4%, 10.1%, and 2.4%, respectively, as of May 14.

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