A Tale Of Two Earnings Reports, Deere Misses And Rallies Anyway

Three weeks ago, heavy-equipment manufacturer Caterpillar (CAT) reported the strongest quarter in its history and raised full year 2018 guidance by a full $2/share and the shares were punished by the market. (Read our April 24th article on the reaction here>>)

The culprit seems to have been an ill-received comment on the investor conference call following the earnings report in which CFO Brad Halverson said that the blowout Q1 results represented a “High Water Mark” for the company.
CAT shares sold off sharply, finishing the next trading session at $144.44, down 6% for the day.

Though the shares have regained the bulk of that loss in the meantime, the message from investors was clear. It’s not a case of “What have you done for me lately?”, but something more like “What are you going to do for me going forward.”
This attitude was on display again Friday (in the opposite direction) as John Deere (DE) reported disappointing fiscal Q2 earnings of $3.14/share, missing the Zacks Consensus estimate of $3.33/share, and revenues of $9.75B, basically in line with estimates.

Deere share rallied sharply on Friday to $155, up $8.59 or 6% on the day.

Higher materials and freight costs were the culprit for the earnings shortfall. Deere is a major consumer of steel and freight services rely on petroleum products, both of which have been more expensive of late.

Sales to the Agricultural sector are about 80% of Deere’s revenues and the report references rising prices and accelerating future estimates for U.S. grains (Corn, Wheat and Soybeans), yet higher costs are impacting the bottom line for farmers, with net cash income for producers expected to fall in 2018, despite the higher sales prices.

Though financial metrics presented by Deere were somewhat mixed, the company provided an optimistic forecast, projecting full-year adjusted earnings of $3.1B, up from the prior guidance of $2.85B.

In an environment where investors are more concerned with the immediate future than recent results, Deere understands and produced a quarterly report that gave the markets exactly what they’re looking for.