Deere beat the consensus estimate by 61 cents per share, but missed on revenue. For the quarter, earnings were $1.55, 61 cents better than the consensus estimates. Despite the fireworks, earnings were actually flat with last year.
Worldwide equipment sales fell 14% to $5.86 billion, slightly below expectations. Net income was $489 million and was well above estimates, mostly due to the agriculture and turf business, lower cost of goods sold, a lower tax rate and the partial sale of the company's landscape supply business. Agriculture and turf revenue was down 11.4% to $4.7 billion. The construction and forestry division reported disappointing sales of $1.1 billion, down 24.5%.
About 15 cents of the earnings number came from the partial sale of its SiteOne Landscape Supply business. Despite the weakness in the agriculture and turf business, earnings before interest and taxes jumped 21% to $571 million. Agriculture and turf EBIT margin rose 320 basis points to 12.1%.
Investors now seem to think the worst is behind the company, or at least it can't get any worse, and are buying the stock based on the relative outperformance of the agriculture and turf business.
But make no mistake. Deere's business really isn't recovering.
Management expects fourth-quarter revenue to be down 8% to $5.46 billion. The company continues to struggle against the global farm recession and difficult conditions in the construction equipment business.
Revenue is likely to decline 10% in fiscal 2016 and another 2% the year after. Revenue peaked in 2013 when Deere reported sales of $37.7 billion and earnings of $9.09. Earnings for fiscal year 2016 are expected to be $4.51, and $4.00 for fiscal year 2017. The company reported earnings of $8.63 in fiscal 2015 and $8.63 in fiscal 2014.
Looking back at the peak, in 2013, the stock traded right around these levels, so what is supposed to drive the stock higher?
Deere is only expected to have $26 billion in revenue this year, almost $12 billion short of its peak revenue. I know investors want to catch the bottom of the cycle, but the stock has already moved and is basically trading as high as it got when the company had $12 billion more in revenue. Why chase it up here?
It's unlikely the construction business will turn around any time soon. Yes, one could argue that the agriculture and turf business is improving sequentially and is getting more profitable, but revenue is still down. The stock is near record highs, but revenue and earnings are not. To me, Deere is better valued under $70. At this price, investors could be caught in the headlights of an oncoming truck.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.