Deere Earnings Smash Wall Street Estimates. Here’s Why the Stock Is Falling.

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Deere

crushed Wall Street’s earnings estimates and increased fiscal-year financial guidance. The stock, however, was down. Current results were great, but investors are worried about whether the current phase of rising demand for agricultural equipment is over.

For its fiscal third quarter that ended in June, Deere (ticker: DE) reported earnings per share of $10.20 from equipment sales of $14.3 billion. Wall Street was looking for earnings of $8.22 a share on equipment sales of $14.1 billion. A year ago, Deere reported profit of $6.16 a share from equipment sales of $13 billion.

Deere also raised guidance on Friday. For fiscal 2023, Deere now expects net income of between $9.75 billion and $10 billion. In May, the guidance range was $9.25 billion and $9.5 billion, while in February management expected $8.75 billion to $9.25 billion.

The roughly $500 million increase is close to the amount by which Deere beat Wall Street’s third-quarter estimates.

Deere stock was down 1% in premarket trading, while

S&P 500
and

Dow Jones Industrial Average
futures fell 0.3% and 0.2%, respectively.

It isn’t much of a move for a big earnings beat. Fears about the top of the agricultural business cycle have been creeping in. “Moving to a more cautious stance on Ag OEMs,” wrote Baird analyst Mig Dobre in a report earlier this week. OEM is short for original equipment manufacturer and refers to companies such as Deere.

Dobre said dealers are restocking inventory, which is good for current results but less good for performance down the road. When their inventories are full, dealers don’t order more products.

Another reason for caution is that U.S. farm income is falling as crop prices moderate, leaving farmers less flexibility in buying gear. The United States Department of Agriculture forecasts about $151 billion in 2023 net farm income, down about 20% from 2022.

Dobre also sees gains in prices for used ag equipment moderating and costs starting to catch up with prices for new gear. He expected Deere to beat earnings estimates for its fiscal third quarter, but said “we recognize a tougher nine to 12-month setup [for shares].”

Dobre still rates Deere stock a Buy and has a price target of $445.

Overall, Wall Street likes Deere stock, but the ratings reveal a hint of worry. About 69% of analysts covering shares rate them Buy, while the average Buy-rating ratio for stocks in the

S&P 500
is about 55%. Four months ago, however, 73% rated shares a Buy.

The average analyst price target is about $456 a share, up about $6 over the past four months.

Target prices moved up after Deere reported its fiscal second-quarter earnings in May. Deere stock has risen about 13% since the company reported fiscal second-quarter results. The

S&P 500
has gained about 4% over the same span.

Target prices might go up again after another strong set of quarterly numbers from the farming giant. Concern about the agricultural business cycle will remain though.

Deere management hosts a conference call at 10 a.m. Eastern on Friday to discuss results.

Write to Al Root at allen.root@dowjones.com