Deere and Company (DE) reported earnings that were slightly ahead of Wall Street estimates for the second quarter. EPS came in at $1.11 on net income of $472 million, which represents a 38% decline from last year, but again is better than consensus estimates of $1.07 per share. Shares appeared to be headed lower in the pre-market trading, but had no trouble recovering as shares were up as much as 5% in Wednesday morning trading on heavy volume.
Deere had missed expectations four straight quarters leading into today, and analysts have become more bearish recently as well. Consensus estimates had declined steadily from $1.19 per share 90 days ago, as the world’s largest farm equipment and machinery dealer has faced headwinds. Unfortunately, Deere back-up those declining expectations by lowered guidance for the second time in as many quarters. The company lowered guidance for the year by 20% after first quarter and now again dropping its net income expectation more than 20% from $1.5 billion to $1.1 billion. The weakness is expected to come from its construction equipment and lawnmower sales. Construction and forestry division sales were especially weak in the last quarter falling 55%, as company-wide revenue was off 17% to $6.75 billion. Deere’s Chairman and CEO Robert Lane said, “Clearly, operations dependent on construction activity and consumer spending are feeling the full impact of the sharp downturn.”
As of our latest report on DE, Ockham has reaffirmed an Undervalued rating on these shares because they are trading well below their normal historical ranges. The destruction of revenue and earnings is certainly distressing though, and it defies logic that this company is trading higher on the news of further lowered guidance. However, it is clear now that the market is not being driven by fundamentals as much as investor psychology. Deere and Company is just the latest to take advantage of the stock rising after beating greatly reduced estimates.