Why Investors Fled After Deere Beat Estimates, Raised Guidance

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Deere & Co. (NYSE: DE) reported third-quarter fiscal 2017 results before markets opened Friday. The farm and heavy equipment maker posted diluted earnings per share (EPS) of $1.97 on revenues of $7.81 billion. In the same period a year ago, the company reported adjusted EPS of $1.55 on revenues of $6.72 billion. Second-quarter results compare to consensus estimates for $1.95 in EPS and $6.92 billion in revenues.

Year over year, quarterly net sales in the worldwide equipment operations group rose 16.6% overall, including a jump of 11% in the United States and Canada and an increase of 25% elsewhere, with no material effect from currency exchange rates.

Operating profit in the equipment group rose from $625 million in the year-ago quarter to $795 million, driven higher shipment volumes and price realization, partially offset by increased production costs, higher selling, administrative and general expenses and warranty costs. Net income rose from $353 million a year ago to $506 million.

For fiscal year 2017 Deere now expects equipment sales to increase by about 10% (up from 9% at the end of the second quarter ) and third-quarter sales to rise by about 24% (up from a prior estimate of 18%). Net sales and revenues are projected to increase about 11% (up from 9%) for fiscal 2017 with net income attributable to Deere of about $2.075 billion (up from $2 billion).

Analysts have forecast fiscal year sales of $25.46 billion, about 8.8% higher than sales of $23.39 billion in 2016. For the year, analysts expect EPS of $6.42 compared with $4.81 last year.

For the third quarter, analysts are looking for EPS of $1.42 and revenues of $6.58 billion. Based on what Deere said this morning about its own third quarter estimates, expect these numbers to rise in the next few days.

CEO Samuel R. Allen said:

We are seeing higher overall demand for our products with farm machinery sales in South America experiencing strong gains and construction equipment sales rising sharply. Deere’s performance also is being assisted by an advanced product portfolio and the continuing impact of a flexible cost structure and lean asset base.

Deere said nothing in its press release regarding its acquisition of German road construction equipment maker Wirtgen for $4.9 billion ($5.2 billion including debt). When the company announced the deal in June it said it expects the transaction to close in the first fiscal quarter of 2018.

The company missed revenue estimates and shares are getting punished, notwithstanding the beat on profit and the raised guidance. This is the third time Deere has raised guidance this year, making it one of the few companies that does not appear to underpromise and overdeliver. Analysts expect more and when they don’t get it, shareholders pay the price.

Shares of Deere traded down about 4% at $119.00 in the premarket Friday, in a 52-week range of $76.94 to $132.50. The consensus 12-month price target was $133.50 before the report.