Short Interest In Deere Causes Some Pessimism For Investors

BMO Capital Markets, which has an Outperform rating and $96 target price, is near the low end of the Street at $0.85 versus consensus of $0.94 — with a few estimates above $1.00.

Looking Forward

"A better-than-expected growing season in North America and falling crop prices points to additional declines in farmer profitability, which likely makes the company a bit cautious on the rest of fiscal 2016, and possibly setting up 2017 as another soft year for new equipment," analyst Joel Tiss wrote in a note.

Tiss said investors will be keen to know Deere's take on 2017 and 2018 end-market demand and what the company's strategy is to prevent EPS from dropping further.

"Although we believe the company will continue to put on a brave face when it report results, management is likely nervous that 2017 may be weak, but the softness could easily continue into 2018," Tiss highlighted.

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Due to "chronic overcapacity," the analyst said, "Deere is under-producing retail demand levels by 15–20 percent to lower new and used inventory in the channel." Deere should be able to raise production in tune with retail demand when equipment retail sales stop declining.

Tiss said Deere had deployed several of the available means to cut profit reductions, thereby leaving few options in the event of even lower 2016 and 2017 equipment volumes.

"If crop plantings, yields, and the growing season are favorable again in the spring and summer of 2017 — bad for grain prices and farmer profitability — Deere could get close to that capitulation moment where it must dig deeper to cut expenses," Tiss added.

At time of writing, shares of Deere were down 0.9 percent at $77.45.

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