Deere's Earnings Power Could Be Stronger Than Guidance Suggests

Deere & Company (NYSE: DE) raised its F2017 guidance, higher than consensus expectations, reflecting revenue growth.

Despite this, the outlook appears conservative and the company’s earnings power seems better than what the current guidance reflects, Wells Fargo’s Andrew Casey said in a report.

Casey maintained an Outperform rating on Deere, while raising the valuation range from $120-$123 to $123-$126.

Earnings Power To Increase

Deere’s performance over the past few quarters suggests a meaningful improvement in the company’s internal returns and cash flow generation, Casey commented.

The company raised its F2017 guidance for operating margin from 6.3 percent to 6.6 percent. The new guidance for F2017 reflects an incremental margin of 14 percent year-over-year on 4 percent revenue growth and also implies an incremental margin of 10 percent on 5 percent revenue growth for the last three quarters of the year, the analyst mentioned.

Related Link: Deere is among World's Top 50 Most Admired Companies

“We think the look forward for the balance of the year sets a low bar that the company can exceed, given likely absence of substantial incremental charges associated with structural cost reduction, anticipated benefit from charges taken during FQ1 17 and expected higher volume driven by improving end market,” Casey wrote.

The EPS estimates for FQ2 2017, F2017 and F2018 have been raised from $1.15 to $1.42, from $4.60 to $4.85 and from $6.00 to $6.20, respectively.

The stock closed Friday at $110.27.