Deere’s Q3 revenue miss estimates, trims FY16 review

Last Friday, the world’s largest farm equipment manufacturer Deere & Company ‘John Deere‘ (NYSE: DE) reported fiscal 2016 third-quarter earnings that beat the analysts’ estimates. The astounding Q3 earnings and the raise in the fiscal 2016 EPS guidance have propelled the share price by nearly 14% so far. However, we believe that there is not much upside left in the share price due to the reasons explained below. Deere finished the previous trading day at $87.95.

The Moline, Illinois-based company reported fiscal 2016 third-quarter net sales of $5.86 billion, down 14% from $6.84 billion in the similar period of fiscal 2015. The Zacks net sales estimate was $5.996 billion. Deere’s third-quarter net sales and revenue (including financial services) stood at $6.724 billion, down 11% from $7.594 billion in the corresponding period of 2015.

The Agriculture and turf Segment reported 11% y-o-y decline in the net sales to $4.704 billion. The Construction and forestry segment recorded a 24% fall in the net sales to $1.16 billion. The Financial services segment reported revenue of $667 million, compared to $636 million in the last year.

John Deere

During the third-quarter, the company recorded net income of $488.8 million or $1.55 per share, down from $511.6 million or $1.53 per share in the third-quarter of fiscal 2015. The Q3 earnings comfortably topped Zacks estimate of $0.94 per share. The increase in the earnings per share was mainly due to the decrease in the number of diluted shares to 315.7 million, from 334.1 million last year.

The farming sector continues to face downhill in the US for the third consecutive year. Such a scenario continues to affect the prospects of John Deere. Since 2014, the company has trimmed the employee count by 2,000. At the end of third-quarter, Deere’s employee count stands at 57,000, down from 67,000 three years back. Deere anticipates the production hours at its Illinois factory to decline by 60% this quarter. The company also plans to decrease the production output at its Iowa tractor plant by 20%.

Due to cost-cutting measures, the company hopes to achieve fiscal 2016 net income of $1.35 billion, up from the prior guidance of about $1.2 billion. However, Deere expects the net sales to decrease 10% y-o-y, against the prior expectation of a 9% decline. Thus, considering the projected tough business scenario, we believe that the share price has little chances of going up further.

The overwhelmingly positive earnings propelled the share price to $88.43, from a low of about $77, in a matter of one week. The historic price chart indicates that the share price will face a resistance at about 91 levels. With a reading of about 72, the RSI indicator indicates an overbought situation. Thus, possibility of a reversal in the price is higher. Another important thing to note is the distance between the current price and the moving average. The large gap indicates that the price would soon reverse to re-test the moving average.

Thus, buying a one touch put option would allow a trader to capitalize on the probable downtrend in price. The target price for the recommended put option trade should be $82 or higher. The binary trader should also select a one month expiry period for the contract.

Chad Simmons

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