Friday, February 21, 2020

Poor Harvest May Have Cropped Deere Q1 Results


What’s happening: Deere & Company is scheduled to report its first-quarter results before the opening bell on Friday, February 21. The stock has underperformed so far this year, losing more than 4%, due to concerns over trade issues and adverse harvesting conditions.

What happened: Although Deere had beaten earnings estimates for the previously reported quarter, this came after six consecutive quarters of misses.

The fiscal first quarter has typically been a light one for the world’s largest seller of farm equipment. Moreover, poor harvesting conditions have impacted Deere’s performance, forcing analysts to lower their estimates for the company over the past three months. Projections are showing a steep decline in earnings and investors are hopeful of an earnings beat.

  • The consensus revenue estimate stands at $6.17 billion, representing an 11.1% year-over-year decline.
  • The estimate for earnings is $1.27 per share, down 17.5% from the same quarter in the previous year.

Why it matters: Being one of the major sellers of agricultural machinery, Deere is dependent on the harvesting season in the US and on exports. The company faced several headwinds last year, ranging from poor weather and harvesting conditions and the US-China trade issues. The wet spring season in 2019 resulted in a delay in crop plantation, while the trade war between the world’s two largest economies affected agricultural exports from the US. Although the US government tried to help the situation by offering subsidies to farmers, this remained underleveraged.

Deere now feels that farmers may remain reluctant to buy agricultural equipment after a disappointing harvesting season. The company has reduced production of farm equipment by 20% to contain costs.

The company didn’t receive any support from its other businesses either. The Construction and Forestry unit’s sales are projected to decline by 14% due to weak construction activity, while the Financial Services segment is expected to report a 1.1% decline in sales.

Deere had reported earnings growth in 2019 to $9.94 per share, from $9.39 per share in 2018. Analysts expect fiscal 2020 to be a tough year for the company and Deere has already guided to a decline in net income to $2.9 billion.

The company has made strong investments in innovative technologies and has exhibited cost disciple, which may have benefited its overall performance.

Management had hoped that the phase one of the trade deal between the US and China, signed in January, would boost China’s purchases of US agricultural goods. However, the coronavirus outbreak has been a major setback.

What to watch: With most companies reporting upbeat results this earnings season, Deere is under huge pressure to beat expectations this quarter. The Illinois-based company is expected to issue updates on crop outlook, as there is growing investor concern around business fundamentals. Investors are also keen on an update on the company’s exports to China, which is a big importer of agricultural products.

The Markets Today


Investors will be watching European stocks today, amid coronavirus concerns, as important economic releases from the area are likely to provide some support to the markets.

Context: European shares closed lower on Thursday, as reports of the coronavirus spreading outside mainland China gave investors new reasons for concern. Disappointing earnings reports from companies also weighed on investor sentiment.

Details: European stocks bucked the positive trend of Asian markets, where stocks posted a rise driven by a slowdown in the number of new virus cases. Despite a decline in coronavirus cases in China as of Wednesday, there were reports confirming new cases outside mainland China. Japan reported more than 70 new cases, with 31 new infections reported from South Korea. Following the first death from the virus, the South Korean government advised 2.5 million people to remain at home. As of yesterday, China’s National Health Commission reported an additional 118 deaths from the virus and 889 new confirmed cases.

Shares of Sweden’s Elekta plummeted around 7% after the company missed third-quarter profit estimates due to a decline in US orders. Air France KLM shares fell around 3% after the company reported lower profits for 2019 and said it expects coronavirus to hurt its operating profit between February and April by up to 200 million euros.

The UK 100 index slipped around 0.3%, with shares of Imperial Brands, Aveva Group and Burberry Group leading the decline. However, shares of NMC Health jumped around 10%, while Smith & Nephew rose over 7%. The UK also reported 0.9% growth in retail sales for January, after posting a decline in the prior two months, boosting investor sentiment.

German 30 declined over 0.9% on Thursday, with the country’s forward-looking GfK consumer confidence index declining to 9.8 points for March, from 9.9 in February. Germany's producer price index rose 0.2% year-over-year for January, versus a 0.2% decline in December.

France reported a 1.5% year-over-year rise in consumer prices in January, unchanged since December. French CAC 40 index dropped 0.8%. Switzerland also reported a rise in its exports for the first time in four months, while the country’s imports fell in January. The Swiss Market Index dropped around 1% yesterday.

Why it matters: After a weak performance in Thursday’s session, attention is on the bunch of economic data scheduled for release today, including services, manufacturing and composite PMIs and inflation report. Investors will also be keeping a close eye on specific economic reports from the European countries.

What to watch: Eurozone composite PMI, which was revised higher to a five-month high of 51.3 last month, is expected to fall to a reading of 51 in February. The IHS Markit services and manufacturing PMIs are also likely to decline to readings of 52.2 and 47.5, respectively. Economists expect the Consumer Price Index in the Eurozone to decline 1% in January, versus a 0.3% rise in December. Eurozone annual core inflation is projected to decline to 1.1% in January, which will be its lowest level since October.

Other Markets: Most European indices closed lower on Thursday, with the UK 100, German 30 and French 40 down 0.27%, 0.91% and 0.80%, respectively.

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What else to watch today


French manufacturing and services PMI, German manufacturing and services PMI, UK manufacturing and services PMI, Italy’s inflation rate, Indian foreign exchange reserves, Brazil’s current account, Canadian retail sales, Spain’s industrial new orders, US composite Purchasing Managers' Index, existing home sales and Baker Hughes North American rig count report and speeches from Federal Reserve Bank of Dallas President Robert Kaplan, Federal Reserve Governor Lael Brainard, Federal Reserve Bank of Atlanta President Raphael Bostic, Federal Reserve Vice Chairman Richard Clarida, Federal Reserve Bank of Cleveland President Loretta Mester and ECB’s Philip Lane.