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John Deere Beat Earnings, But One Other Factor Stood Out to Investors

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John Deere  (DE)  shares rose after the company beat earnings expectations and said it is pulling several strings to shore up liquidity during an uncertain time. 

The stock rose 1.6%. It’s down roughy 18% year-to-date, worse than the S&P 500’s fall of about 10%. The stock has rebounded roughly in line with the S&P 500’s move up since March 23, as investors price in what is expected to be a strong 2021 recovery. But the shares overall have been held back slightly from reaching a full valuation compared to the stock's history. 

For the reported quarter, the lower sales results were driven by falling sales volumes, as demand dropped due to the coronavirus wiping out much industrial and construction activity. Like many companies hurt by the pandemic, earnings fell harder than sales as the operating margin contracted on account of health and safety costs, among others. Deere also said it incurred hundreds of millions of dollars in impairment charges on equipment. 

Here were the results versus Wall street expectations: 

  • Earnings per share: $2.11 v. $1.80 (-40% year-over-year)
  • Revenue: $9.25B v. $7.66B (-18%)

The company did offer a full-year outlook, unlike most companies recently. Management is looking for $1.8 billion in net income versus analyst estimates of roughly $2 billion. The full year will show a harsh decline in earnings, but EPS is expected to grow 36% in a 2021 rebound. 

One important factor for investors on the earnings report was what the company said about getting through the year. Management is shoring up liquidity by not only “aggressively” cutting operating expenses, but also cutting capital expenditures, which supports free cash flow.

The company is also raising $4.5 billion in debt. This allows it to have plenty of cash to pay for an ugly 2020, thus allowing investors to continue pricing in what could be a strong 2021, excluding more coronavirus troubles. 

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