How Did Deere Perform In Q2?

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Trefis
DE: Deere logo
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Deere

Deere (NYSE: DE) reported weaker-than-expected second quarter results last week, missing both revenue and earnings consensus estimates. Revenues in the quarter came in at about $9.75 billion (+34% year-on-year), while the company reported adjusted EPS at about $3.14. The weaker-than-expected bottom line was a result of higher raw material and freight costs. Despite this, Deere raised its 2018 outlook slightly, owing to broad-based improvement in the agricultural and construction segment. We expect continued global tailwinds – increased global food consumption and higher population density that will drive a greater need for infrastructure development – to drive these results. Further, the implementation of U.S. tax reform, which brings down the effective tax rate by nearly 500 basis points to a range of 25-27%, should help it further boost its bottom line. Below, we take a look at what to expect when the company reports earnings.

The company’s stock is now trading at around $155, which is slightly below our price estimate of $178. We have created an interactive dashboard elaborating on our valuation process. You can adjust the key drivers and forecasts and arrive at your own price estimate for the company’s stock.

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For 2018, Deere expects further improvement in the Agriculture segment, driven by strong order activity – increased replacement demand and need for new equipment. Further, its most recent acquisition of Blue River Technology should help farmers reduce costs by decreasing the use of herbicides, which should lead to increased demand for its crop spraying equipment and provide decent long-term benefits. We expect the positive outlook for Deere to continue into 2018, driven by improving conditions of the agriculture market, and increased global food consumption, which will likely spur demand for its agriculture products. The Construction segment contributes nearly 20% of the company’s overall revenues and has been the fastest growing segment of late, primarily due to the higher shipment volumes and its acquisition of Wirtgen Group. In addition, strengthening of the U.S. economy should boost the U.S. Housing market and construction spending. The industry is expected to grow further in 2018 which, coupled with the Wirtgen acquisition, should boost Deere’s construction business.

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