Deere Q2’17 Pre Earnings: What To Expect?

Deere (NYSE: DE) will report its second quarter fiscal 2017 earnings on May 19. Although we expect Deere’s overall sales to decline in low single digits, its profits may increase due to cost cutting measures. The challenging conditions in the North American agriculture industry continued in the first quarter of 2017, and the total farm income in the U.S. is expected to decline by 9% this year. Thus, we expect that the growth in Deere’s new equipment sales will remain low. However, after-sales products may grow this quarter, as used inventory is at a relatively high level, which generally leads to demand for after-sales products. Food prices have increased in the last couple of quarters, but are still lower compared to 2014 levels, which may not be enough for dealers to replace their used equipment inventory.

Deere’s construction equipment sales are also expected to decline this quarter due to the downturn in the North American construction industry. However, Deere’s overall sales are expected to improve from last quarter as declines from North America will be partially offset by increased revenues from Asia Pacific. Strength in Asia primarily came from China, where increased government support for construction and strong residential investment led to increased demand.

On the other hand, Deere’s profits and EPS are likely to increase this quarter due to its cost cutting and restructuring efforts in the last year. Deere has improved its operational efficiency and supplier relationships in order to cut costs in the last year. These measures paid off last quarter, when its profits increased by nearly 35%, and we expect this to continue in the second quarter as well.

Agriculture Equipment Revenues To Shrink Due To Declining U.S. Farm Incomes

The U.S. department of agriculture has forecast farm income in 2017 to decline by 8.7% from 2016, which would mark the 4^th consecutive year of decline after 2013 due to record harvest and low food commodity prices globally. The declining farm income and lower used equipment prices of agriculture equipment may not allow dealers to increase their new equipment inventory, and thus we expect Deere’s agriculture equipment sales to decline in low single digits this quarter. Food commodity prices have been increasing for the past couple of quarters, but that still isn’t enough to boost farmer confidence. However, this may result in an increase of Deere’s after-sales products due to the depreciation of used equipment.

For more information, please refer to our complete analysis for Deere

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