What To Expect From Deere’s Q2?

Deere & Company (NYSE:DE) is scheduled to report its fiscal second-quarter results on Friday, May 21. We expect Deere to likely post revenues and earnings slightly below the consensus estimates. Deere is expected to benefit from improved demand for agriculture as well as construction equipment, as the economies are opening up gradually, bolstering its overall revenue growth during the quarter. Our forecast indicates that Deere’s valuation is around $384 per share, which is in-line with the current market price. Now, based on our estimates, the company will likely report numbers below the street expectations, which is likely to result in DE stock trading lower post the Q1 announcement, and that may offer a good entry point for long term investors to buy the stock. Look at our interactive dashboard analysis on Deere & Company Pre-Earnings: What To Expect in Q2? for more details.

(1) Revenues expected to be below the consensus estimate

Trefis estimates Deere’s Q2 fiscal 2021 total revenues to be around $10.2 Bil, slightly below the consensus estimate of $10.4 Bil. The company saw a strong rebound in the demand for construction as well as agriculture equipment in Q1, with revenue rising a solid 19% to $9.1 billion. The company, of late, has seen an increase in spending on agricultural equipment, primarily small tractors, and this could continue to drive the revenue growth in Q2. Deere in its previous earnings conference call provided an outlook for roughly 20% revenue growth for both Agriculture & Turf as well as Construction & Forestry segments in 2021, primarily small agriculture, which ended the year at historic lows for inventory to sales ratio, and the company expects the inventory levels to rebound in 2021. However, a high inflation due to high demand and supply constraints post the pandemic could result in increased expenses for farmers, impacting the overall spend on agricultural equipment, over the coming quarters. Our dashboard on Deere Revenues provides more details on segment-wise revenue breakup.

2) EPS likely to be below the consensus estimates

Deere’s Q2 2021 earnings per share (EPS) is expected to be $4.25 per Trefis analysis, 6% below the consensus estimate of $4.52. Deere’s net income of $1.2 billion in Q1, reflected a 137% growth from its $517 million profit in the prior year quarter, led by a decline in operating expenses. Q1 also saw a higher price realization for all the segments, aiding the overall margins, a trend which may continue in Q2 as well. Looking at the full year 2021, we expect a 70% y-o-y growth in EPS to $14.75, aided by both revenue growth as well as margin expansion.

(3) Stock price estimate in-line with the current market price

Going by our Deere & Company Valuation, with an EPS estimate of around $14.75 and P/E multiple of 26x in fiscal 2021, this translates into a price of $384, which is in-line with the current market price – $384.

Although the coronavirus outbreak has had a sizable impact on Deere’s business in fiscal 2020 due to lower demand for its equipment, the demand for both agriculture as well as construction equipment is seeing a rebound as the spread of the virus subsides, and this will result in strong revenue and earnings growth for Deere in the near term, in our view. That said, the rebound appears to be already priced in the current share value of $384, implying DE stock is fully valued at the current levels.

Note: P/E Multiples are based on Share Price at the end of the year, and reported (or expected) Adjusted Earnings for the full year

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