Wall Street Responds Harshly to Deere & Co's Solid Q2 Earnings Performance

Typically, beating expectations for profitability translates to a cause for celebration. Unfortunately, agricultural equipment manufacturing specialist Deere & Co. (US:DE) couldn’t quite benefit from its robust financial performance it posted last Friday, with DE stock fading nearly 2% following the disclosure. Still, contrarian market participants may have an undervalued opportunity on their hands.

For Deere’s fiscal second quarter ended April 30, the company reported net income of $2.86 billion, comparing favorably to the year-ago quarter’s tally of $2.098 billion. Further, for the first six months of the fiscal year, net income attributable to Deere was $4.819 billion, according to its press release. This haul tops the year-ago comparison of just over $3 billion.

On a per-share basis, the agricultural equipment specialist posted fully diluted earnings per share of $9.65, besting the year-ago EPS of $6.91. Also, according to Reuters, analysts anticipated EPS in the latest quarter to land at $8.59.

For worldwide net sales and revenues, this figure increased 30% to $17.39 billion for Q2. For the first six months of the fiscal year, total revenue jumped 31% to $30.04 billion.

“As shown by the company’s outstanding second-quarter results, Deere continues to benefit from favorable market conditions and an improving operating environment,” said in part Deere Chairman and CEO John C. May.

Bad Response

Unfortunately, the market didn’t respond well to the quarterly results, sending DE stock southbound. The decline materialized despite management raising its 2023 net income forecast to a range between $9.25 billion to $9.50 billion, higher than the previous range between $8.75 billion to $9.25 billion.

Analysts worried that increasing production levels may translate to an oversupply of equipment. “It’s a subtle way of saying to investors ‘don’t extrapolate a better expected second-quarter into the next couple,” remarked Matt Arnold, equity analyst at Edward Jones, Reuters reported.

Still, most traders appeared enthusiastic about DE stock. Following Friday’s close, Deere represented one of the highlights on Fintel’s screener for unusual stock options volume. Call volume hit 61,575 contracts against an open interest reading of 57,481. On average, call volume reaches 4,248 contracts.

Moving to the other side of the equation, put volume landed at 45,357 contracts against open interest of 80,271. Put volume for DE averages 5,398 contracts.

To be fair, the put/call ratio of DE stock currently stands at 1.40. Since puts generally represent bearish bets, a put/call ratio greater than one indicates pessimism. In the open market, DE shares slipped more than 14% on a year-to-date basis.

Contrarian Opportunity

Still, this circumstance may open an undervalued opportunity for contrarian investors. Currently, the price-earnings ratio of DE stock sits at 13.41. Given Deere’s broad business footprint, the company may either fall under the engineering/construction sector or the farming/agriculture industry.

Either way, according to data from New York University, DE stock rates as a discount. For engineering/construction, the sector carries a trailing PE ratio of 29.06. For farming/agriculture, the sector’s PE ratio is 22.12.

This article originally appeared on Fintel

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