Earnings: Farming and Commodity Slump Weighing on Deere & Company?

Deere & Company DE, by its own admission, is stuck in the middle of a “global farming recession” that doesn’t show any immediate signs of reversing course. Going into Q2 earnings from the world’s largest maker of farm equipment, analysts are well aware of DE’s risks and are looking for any signs of relief.

Analysts may have gotten some relief when DE said in late July that it was “indefinitely” laying off another 120 production workers at its main machinery maker, Harvest Works, in Moline, Ill. That puts the number at 2,000 DE workers out of jobs in the last two years in Illinois and Iowa alone.

Tuesday’s news, ranging from 13F filings at the Securities and Exchange Commission that well-known big-time investors like Berkshire Hathaway Inc. BRK, among others, have recently trimmed their DE positions, to Moody’s decision to shift its credit outlook to negative from stable while affirming it’s A-2 long-term and Prime-1 short-term ratings, doesn’t appear to be helping.

Here’s what Moody’s said in the release: “The negative outlook reflects the challenges Deere is facing as the result of the broad and lengthy weakness in farm equipment demand, which is contributing to low profits and cash flow, and unusually low margins.

“The weak equipment demand is unprecedented in its severity and length, but is driven by an unusually strong string of crop harvests [that] led to excess grain supplies and pushed down commodity prices. Moody's current outlook for 2017 points toward flat market conditions with respect to agricultural commodity harvests and pricing. Consequently, the company's operating performance could remain under pressure for another year.”

DE’s quarterly results have dropped in the last nine quarters as farmers have either cut back or postponed new-equipment spending amid a downturn in grain prices, including corn. During the Q1 earnings report, DE said its full-year sales are projected to fall by 9%.

Analysts reporting to Thomson Reuters have a consensus forecast of earnings per share at $0.94, off 39% from last year’s profit of $1.53 a share. Revenues for the quarter are expected to reach $6.1 billion, about 10% lower from $6.8 billion in the year-ago period.

Short-term options traders have priced in a 3.5% potential share price move in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform by TD Ameritrade.

Options trading has seen some activity at the 75-strike puts and the 81.5-strike calls. The implied volatility is at the 31st percentile. (Please remember past performance is no guarantee of future results.)

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.