Deere Rips the Cover Off the Ball: Here’s the Trade

Deere & Co (DE) released the firm’s fiscal second quarter financial results on Friday morning. For the three month period ended April 30th, Deere posted GAAP EPS of $9.65 on revenue generation of $17.387B. These numbers simply crushed Wall Street’s expectations for both the top and bottom lines. Year over year revenue growth of 30.1% was good enough for a third consecutive quarter of 30%+ growth. Agriculture as a growth industry? In 2023? Yet bet your tail.

Cost of sales increased 20.3% to $10.73B as operating expenses increased 47.8% to $2.809B. This left the firm with total costs and expenses of $13.539B (+25.2%). After accounting for interest and taxes, net income printed at $2.859B, which was up 36.6% from the year ago comparison.

Segment Performance

– Production & Precision Agriculture grew sales by 53% to $7.822B, producing an operating profit of $2.17B (+105%) on an operating margin of 27.7% (up from 20.7%).

– Small Agriculture & Turf grew sales by 16% to $4.145B, producing an operating profit of $849M (+63%) on an operating margin of 20.5% (up from 14.6%).

– Construction & Forestry grew sales by 23% to $4.112B, producing an operating profit of $838M (+3%) on an operating margin of 20.4% (down from 24.3%).


For the fiscal full year, Deere expects to realize net income in a range spanning from $9.25B to $9.5B. This is up significantly from the range provided three months ago of $8.75B to $9.25B. Cash flow from equipment operations is seen at $10B to $10.5B.

From a segment perspective, still for the full year, Deere sees:

– Production & Precisions Agriculture sales up about 20%.

– Small Agriculture & Turf sales up about 5%.

– Construction Forestry sales up around 15%.

The Fundies

For the first six months of the fiscal year, Deere has generated negative operating cash flow due to a large outlay for receivables related to sales of $4.407B. This left the firm with operating cash flow of $-147M. Do not be alarmed. Struggling to post positive operating cash flow for the first six months of the year is quite normal for Deere. It’s also quite normal for Deere to post an overwhelmingly positive final six months of the fiscal year.

After purchases of property & equipment of $584M and $1.229B worth of costs of equipment on operating leases, six month free cash flow printed at $1.96B. The firm still paid out $697M in dividends to shareholders and repurchased $2.546B worth of common stock. So, you know that we have to watch this. The company did say that they still see $10B to $10.5B in full year cash flow from operations. Looked at in one year increments, the firm regularly had produced enough free cash flow to buy back stock, pay shareholders and pay down some debt.

Turning to the balance sheet, Deere ended the quarter with a cash position of $6.123B and inventories of $9.713B. That brings current assets to $79.537B. Current liabilities add up to $37.715B, including $17.109B in short-term debt. The firm runs with a quite robust current ratio of 2.1 and a still very healthy quick ratio of 1.85. Still, I have to be concerned with that much debt maturing within a year, and just how much the firm will be impacted by increased costs to borrow. This is where a larger cash position would have come in handy. Total assets amount to $98.347B, including just $5.185B in goodwill and other intangibles, so that’s not an issue. Total liabilities less equity comes to $75.846B. This does include $35.611B in long-term debt, so using free cash flow to pay down debt will be important.

Wall Street

It’s early. I have only seen one reaction from a highly rated analyst at this time. Five star (rated by TipRanks) analyst Timothy Thein of Citigroup reiterated both his “buy” rating and his $505 target price, and commented that he sees demand for large-ag volumes remaining strong into 2024.

My Thoughts

I’m impressed. I had been trading the stock this morning until I found out that I would be covering the stock. I have a small long position in place that I left there. Performance and guidance are solid across all segments. There has been a dramatic increase in margin. The firm says that it’s on track to produce healthy operating cash flow. What’s not to like? Agriculture, as we have seen in eastern Europe and Asia as well as at home, is going to remain a big deal.

Readers will see that DE has been mired in a downward sloping price channel since gapping higher late last November. This morning’s move is significant, and perhaps more significant than was that November gap, as this time the stock has retaken its 21 day EMA (exponential moving average), and 50 day SMA (simple moving average) on the move.

Note that the stock has made an attempt (so far unfulfilled) at taking back its 200 day SMA as well. That would really force portfolio managers to increase exposure, but the 50 day will do for now. I want to show you something. Let’s zoom out…

Not that we all got it right. We did not, but those late 2022 highs were really just the completion of a giant double top reversal pattern that apexed first in April. The 2023 contraction in share price was predictable. In hindsight.

Understanding that the just created gap between $371 and $379 may have to fill, I now see the 200 day line as a moving pivot. A take and hold of that thin red line could produce a $450 target. For today, I’d take my football and go home at $393 for a nice short-term trade.

(Deere & Co is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells DE? Learn more now.)

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2023-05-19 15:15:00