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11.24.2016

Deere Experience: The Expectations Exuberance

Security prices are ideally supported to follow the underlying financial performance and though markets tend to discount the future developments well in advance, massive price movements tend to become out of sync with the reality at times. This is most visible when the broad indices are in a heavy bull run or even in a massive downtrend.

Take the case of Deere stock. Shares in tractor maker Deere & Company soared, as the company issued a relatively upbeat forecast for the coming financial year, at least compared to expectations. And results for the most recent period also comfortably beat expectations, according to an article on Agrimoney.com. (here is the link http://www.agrimoney.com/news/deere-shares-soar-on-comparatively-upbeat-sales-forecast--10190.html)

The article stated further that Deere saw sales falling only slightly, and said the company was well placed to survive the current downturn thanks to cost saving measures. However, Tractor sales in South America are expected to rally in the coming year, thanks to the recovering economic situation there.  Here comes the clincher. “Deere forecast company equipment sales, and overall net sales and revenues, to fall by about 1% in the year from November 1, where a Reuter's survey of analysts saw revenues dropping by 2.9% for the full year.”

The stock went up a whopping 11% in a single session following the “upbeat” results. The YTD gain so far is about 34%. Now the question is will the stock continue to perform like this in next few months if the financials come in line with the estimates or worse still, if they turn out to be below these current estimates?
Ideally, with falling sales, the prices should be at least be factoring in the possibility of a tepid turn in earnings over coming months. But, as stated in the article “Results for the August to October period also beat expectations.  Net sales over the period were down 4.7% year-on-year, at $5.65bn, but beating analyst expectations of $5.36bn. And although net profits were down 16.7%, at $0.90 a share, this was well ahead of analyst expectations of $0.39 a share. Deere shares were up some 8.3% in morning deals in New York, at $99.35”

How do you justify something as ironic as this? One more article offers some explanation. As quoted in https://www.incomeinvestors.com/urgentdeere-company-de-stock-soaring-today/9035/,  Deere & Company (NYSE:DE) stock is up 11%, due to a fourth-quarter earnings beat. Deere reported earnings per share (EPS) of $0.90, which more than doubled analysts’ estimate of $0.36. The total sales revenue came in at $5.65 billion in the quarter, which was higher than the estimate by analysts of $5.35 billion.

Keeping aside, the “expectations” irrationality for while, the surge in the stock could be easily explained by the fact that the US stocks are on a tear and currently been making a series of all time highs. One more article sums up the underlying business scenario for Deere in a much ordinate manner. “US farmer incomes are projected to fall to the lowest level in seven years as consecutive bumper crops have tempered prices. Tractor inventories are at record highs and credit availability has tightened. North American inventories through October were 5.5% higher than a year ago, data compiled by Bloomberg show”, according to http://farmfutures.com/story-deere-profit-forecast-tops-estimates-amid-cost-cutting-0-149813.