Deere & Co. :DE-US: Earnings Analysis: Q2, 2017 By the Numbers : June 8, 2017

Deere & Co. reports financial results for the quarter ended April 30, 2017.

We analyze the earnings along side the following peers of Deere & Co. – AGCO Corporation, Caterpillar Inc., Toro Company, Kubota Corporation Sponsored ADR, Komatsu Ltd. Sponsored ADR, PT United Tractors Tbk Unsponsored ADR and Honda Motor Co., Ltd. Sponsored ADR (AGCO-US, CAT-US, TTC-US, KUBTY-US, KMTUY-US, PUTKY-US and HMC-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 8111 million, Net Earnings of USD 802.20 million.
  • Gross margins widened from 23.62% to 29.17% compared to the same period last year, operating (EBITDA) margins now 20.88% from 15.09%.
  • Year-on-year change in operating cash flow of 21.97% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-04-30 2017-01-31 2016-10-31 2016-07-31 2016-04-30
Relevant Numbers (Quarterly)
Revenues (mil) 8111 5624.2 6518.7 6647.4 7874.4
Revenue Growth (%YOY) 3 1.82 -2.83 -12.42 -3.12
Earnings (mil) 802.2 193.7 285.2 488.5 495.2
Earnings Growth (%YOY) 62 -23.83 -18.75 -4.48 -28.25
Net Margin (%) 9.89 3.44 4.38 7.35 6.29
EPS 2.49 0.61 0.9 1.55 1.56
Return on Equity (%) 44.08 11.57 16.3 26.69 28.72
Return on Assets (%) 5.57 1.36 1.96 3.32 3.44

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Market Share Versus Profits

Revenues History
Earnings History

DE-US‘s change in revenue this period compared to the same period last year of 3.00% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that DE-US is holding onto its market share. Also, for comparison purposes, revenues changed by 44.22% and earnings by 314.15% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s earnings growth was influenced by year-on-year improvement in gross margins from 23.62% to 29.17% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 15.09% to 20.88% compared to the same period last year. For comparison, gross margins were 25.54% and EBITDA margins were 15.68% in the last reporting period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

DE-US‘s gross margin improvement has not produced any big difference in its working capital. Working capital days are currently -59.04, compared to last year’s level of -63.87 days. This leads Capital Cube to conclude that the improvements in gross margins are likely from operating decisions and not trade-offs with the balance sheet.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

DE-US‘s change in operating cash flow of 21.97% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 10.16% to 15.61% and (2) one-time items. The company’s pretax margins are now 14.42% compared to 9.31% for the same period last year.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

Deere & Co. manufactures and distributes a complete line of equipment used in agriculture, construction, forestry, and turf care. It also manufactures engines and other power train components. The company also provides credit and other services to customers around the world. It operates its business through the following segments: Agriculture & Turf, Construction & Forestry, and Financial Services. The Agriculture & Turf segment primarily manufactures and distributes a full line of agriculture and turf equipment and related service parts, including large, medium and utility tractors; loaders; combines, corn pickers, cotton and sugarcane harvesters and related front-end equipment and sugarcane loaders; tillage, seeding and application equipment, including sprayers, nutrient management and soil preparation machinery; hay and forage equipment, including self-propelled forage harvesters and attachments, balers and mowers; turf and utility equipment, including riding lawn equipment and walk-behind mowers, golf course equipment, utility vehicles, and commercial mowing equipment, along with a broad line of associated implements; integrated agricultural management systems technology; precision agricultural irrigation equipment and supplies; landscape and nursery products; and other outdoor power products. The Construction & Forestry segment primarily manufactures and distributes machines and service parts used in construction, earthmoving, material handling and timber harvesting, including backhoe loaders; crawler dozers and loaders; four-wheel-drive loaders; excavators; motor graders; articulated dump trucks; landscape loaders; skid-steer loaders; and log skidders, feller bunchers, log loaders, log forwarders, log harvesters and related attachments. The Financial Services segment primarily finances sales and leases by dealers of new and used agriculture and turf equipment and construction & forestry equipment. This segment also provides wholesale financing to dealers of the foregoing equipment, finances retail revolving charge accounts and operating loans and offers crop risk mitigation products and extended equipment warranties. Deere was founded by John Deere in 1837 and is headquartered in Moline, IL.

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