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Here's John Deere's Silver Lining For Earnings

Video Credit: The Street
Published on November 27, 2019 - Duration: 01:12s

Here's John Deere's Silver Lining For Earnings

Deere shares were falling on an unexpected estimate that sales and earnings in 2020 would contract.

But the company is creating an earnings safety net for the rough times.

The stock fell as much as 5.4% to $167.05 in Wednesday trading.

John Deere is TheStreet's premium sister site RealMoney's Stock of the Day.

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The Moline, Ill., company posted adjusted earnings per share of $2.14, beating analysts' estimates of $2.13.

Revenue was $9.89 billion, ahead of Wall Street expectations of $8.43 billion.

But analysts were looking for slight revenue and earnings growth for 2020 and management guided for a contraction.

Revenue guidance for the year is for a contraction of 5% to 10%.

Net-income guidance is for a range of between $2.7 billion and $3.1 billion.

Net income for 2019 is expected to be $3.25 billion.

Management said falling demand is largely responsible for the guidance.

The U.S.-China trade war is partly responsible for the falling demand, as it prompts fewer sales of agricultural products from the U.S. to China.

But the "silver lining is stronger-than-expected cost control embedded in the outlook," wrote Goldman Sachs analyst Jerry Revich in a note.

He sees, baked into the 2020 guidance, gross margin expanding by roughly a percentage point to 24%.

"We view Deere's 2020 outlook as well below expectations, driven by disciplined production cuts." Revich is looking for management to comment on the next few years as well.

He said "our focus... will be 2022 margin improvement/cost reduction targets." To make things even brighter, "even in the context of potential underproduction in 2020, segment margins could hold in better versus what current guidance implies," Morgan Stanley analyst Courtney Yakavonis wrote in a note.

Here's the point: John Deere is a cyclical company, and when volumes fall as demand falls, cost discipline and maintaining profit margins can provide a floor to earnings when the going gets rough.

Deere shares are up 18% year-to-date.

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