How and Why Deere & Company Stock Crushed It in November
What happened
Agricultural equipment manufacturer Deere & Company (NYSE: DE) soared 12.8% in November on the back of a strong set of fourth-quarter earnings and a positive outlook for 2018. It's been a difficult few years for the company but 2017 marked the passing of a trough in revenue and earnings and Deere looks set for an upswing in the agricultural machinery cycle.
Here's a quick recap of the full-year earnings compared to the full-year guidance given on the third-quarter earnings call alongside the formal guidance for full-year 2018.
| Deere & Company | Guidance at Q3 17 |
Actual FY 17 |
Forecast FY 18 |
|---|---|---|---|
| Ag & Turf Net Sales |
9% |
9% |
9% |
| Forestry & Construction Net Sales |
15% |
17% |
69%* |
| Worldwide Financial Services |
475 |
477 |
515 |
| Net Sales (equipment sales) |
10% |
11% |
22%** |
| Net Income |
2075 |
2159 |
2600 |
The headline data and guidance is good enough, but it only tells part of the story. The underlying takeaway from the earnings report is that U.S. and Canada agriculture equipment sales -- Deere's most important end market -- are forecast to increase 5%-10% in 2018 following a decline in 2017.
The positive outlook in North America comes despite Deere's expectation that U.S. farm cash receipts will decline 2% in 2018 to $368 billion after increasing 3% in 2017. Discussing the North American outlook on the recent earnings call Manager of Investor Communications Josh Jepsen said:
So what
The results and outlook help confirm the fact that Deere's management has done a good job in managing the downturn and that the cycle is starting to turn. In particular, the positive outlook and commentary on replacement demand for large agricultural equipment -- a problem area for the company -- in North America is a sign that farmers can no longer defer purchasing equipment. Meanwhile, the strong outlook for forestry & construction confirms what competitors like Caterpillar Inc. (NYSE: CAT) have been saying recently. Here's how Caterpillar crushed it in 2017.
Now what
Aside from hitting the numbers in 2018, investors can look forward to the potential upside from construction coming from an infrastructure stimulus. In addition, Deere's positive forecast for North American agriculture machinery sales is being made despite ongoing price weakness in key crops like corn and soybeans. This means that any kind of increase in crop prices, and consequently farmers' income, could boost the sales recovery even further. Something to look out for.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.