Checking In On Global Agriculture With Deere & Company Earnings

Since fiscal 2014, Deere & Company DE management has cited weakness in the global farm economy as the primary reason for lower sales and earnings. More recently, weakness in the company’s construction equipment markets was cited as an additional reason for softer sales. Last quarter it said that key agricultural markets showed signs of stabilization, but results were still pressured by the persistence of soft conditions in its farm and construction equipment business.

Deere releases fiscal Q2 earnings before market open on Friday, May 19. Earnings are expected to increase 9% year-over-year to $1.70 per share on revenue of $7.2 billion, according to consensus third-party analyst estimates. Towards the end of last year, the company announced plans to take steps to achieve a more efficient cost structure. Any rise in earnings this quarter might be due in part to its voluntary employee separation program, which management has said it expects will save $75 million in the quarters following its initiation at the end of fiscal 2016.

Historically, fiscal Q2 revenues have generally been the highest due to the seasonal nature of the company’s agricultural and turf equipment business, which is its largest division. After several quarters of declining revenue, analysts are expecting an increase of just under 2% year-over-year.

On a macroeconomic level, net farm income (the total income generated by farmers after expenses) is expected to drop 10.5% in 2017, according to a U.S. Department of Agriculture. Farmers generally spend less on farming equipment, which can cost hundreds of thousands of dollars, when their overall income drops. Many analysts think this trend that’s driven by depressed commodity prices could impact companies that manufacture agriculture-related equipment. 

Looking at options activity, traders have priced in a potential stock move of just under 5% in either direction, according to the Market Maker Move indicator on the thinkorswim platform. The stock just hit an all-time high of $114.80 in trading this week, but has since pulled back with the broader markets.

In short-term trading at the May 19 monthly expiration, calls had higher volume at the 115, 116, and 120 strike prices and puts had higher volume at the 105 and 110 strikes. As of Thursday morning, the implied volatility is at the 98th percentile. It was at the 75th percentile in trading yesterday, but has spiked higher as market volatility picked up.

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. 

Deere & Company Financial Services

Like Caterpillar Inc. CAT, Deere also operates a financial division that provides leasing and financing services. Some analysts have said rising interest rates could potentially reduce demand, but the company might also be able to generate additional revenue from an increase in prevailing interest rates. Fiscal-year 2017 net income attributable to its financial services operations is expected to be roughly $480 million, according to last quarter’s guidance. 

Earnings season has almost come to an end, but there’s still a few companies left to report and markets are starting to move again with a big jump in volatility yesterday.